Review & Outlook

Our take on the investing, financial, & economic themes of the day

Inflation Quandaries

12 July, 2017 by Mark O'Brien in Commentary

Monday’s Wall Street Journal (July 10, 2017, page A2) contains a remarkable article. It is remarkable because it reveals the assumptions and attitudes of the experts who are trying to administer the global economy in which we find ourselves.

The headline of the article provides the background: “Weak inflation vexes Central Banks.”  Anyone who has followed financial news over the last 9 years knows that  central bankers in the developed world, including the United States, are trying to kindle a measure of inflation.  That’s because the economy has been anemic, if not stagnant, and the troupe of Keynesian and monetarist central bankers think that a little inflation will get things going again.   Problem is, there is no inflation, and the central bankers have no explanation why not.  According to their models, we should have lots of inflation but we have none.  Indeed, deflation and stagnation continue to dog their best efforts to the contrary.

Page three of our quarterly appraisal letter, which is today going into the mail to clients, and which is available to read nearby, discusses a curious parallel to this time.  For it is a matter of record that we in the United States have been in this place before.  In the late 1920s  the government’s efforts to promote inflation in the farm belt had the contrary effect, and for predictable reasons.   I urge readers to read the nearby account.  But the point I want to make here is a bit different than drawing an historical parallel.  It is about the assumption and attitude of the central banks, and those who cover their efforts in the press.

If a theory does not explain experience (and the current mix of Keynesian and monetarism does not), then you would think the theory is wrong, and people would recognize it, especially in the press.  That’s how it works elsewhere.    But rather than admit their kit of monetary and fiscal tools aren’t working,  the central bankers, and the press that cover them, wait for the people to start behaving the way they are “supposed to”.  As I said, this is a remarkable story.  One wonders how long it will take to scrap the tool kit.