Perhaps I am slow, but the lights just suddenly came on inside my head as I was considering the importance of the Sumner Critique in describing the perverse behavioral incentives of the central bankers themselves that are created by the current inflation-targeting monetary policy framework.
Dr. Sumner has never put it out there in the way in which I am about to, but I consider it a roughly-right and perhaps vulgar equivalent (kind of like putting lipstick on without a mirror). I obviously have no worries about the way ideas are presented here on my blog; I do not plan on a future as an economist in either the public or private sectors, and so I can lay it down in very plain and easy to understand language.
How I came to understand the meaning of the Sumner Critique was in applying it to the question of whether the Fed should embark on another round of QE. I agree with the opponents of more QE, although violently so, because under the current policy framework, the size, duration or promises that might come with it do not matter at all. It will be counteracted as soon as the forecast of expectations breach the 2% core PCE ceiling, if it not before. But in ensuring that policy doesn’t overshoot, which it must do in order to improve economic circumstances, the Fed must sell some assets at a loss or it needs some exogenous negative shock to destroy someone else’s assets. In other words, it has no issue with destroying privately held assets in a mini-nominal shock to bring inflation expectations back down to the 48 month average of 1.1% (that *could be* the Fed-action-free rate) and avoid taking losses on its own assets.
Folks, I cannot stress enough how damaging this explicit 2% inflation ceiling posing as price stability (or any other kind of stability) is to a free-market economy and a democratic-republic political system. It isn’t just about the price of anything we buy going up or down that you should care about. It is about the perverse incentive to not provide stability to markets or do anything to produce optimism about the future so people live in fear and doubt, because in that state private assets can and will be readily destroyed by exogenous shocks so the central bank can meet its target without taking a loss. And some say inflation is theft? This is much worse considering that they do it while calling the victims “irresponsible.”
This is exactly why Europe is in a perpetual state of crisis and private assets, such as sovereign bonds, are being destroyed. They have a much more acute issue with inflation due to supply-side policies (like the VAT) than we do here in the US and their inflation benchmark includes all taxes and import prices (oil) hence more impetus on disinflation, and losses for everyone around, 24×7, day or night. The ECB and the Fed are equal opportunity preventers and destroyers of wealth while handing you the BS Emperor’s new clothes line of price stability and how important it is to maintain their credibility in fighting inflation destroying private assets. Perhaps people would be just a little upset if they thought that fighting inflation at historically low levels means that their life’s savings disappears from their retirement accounts over night on a regular basis– but of course the Fed has already done that and very convincingly told everyone that it was for your own good.
I know where the profit the Fed generates goes (and I could do some really nasty satire regarding that circumstance – will save that for later), but I don’t know where the profit the ECB generates goes. If you know, please leave me a comment (I won’t post it here if you don’t want me to.)
I just wanted to add a thought that came to me after writing this.
The ZLB matters to the extent that the Fed thinks it matters. Apparently it matters a lot since it is willing to resort to exogenous negative shocks as a regular mechanism of sustaining the 2% inflation ceiling, i.e. destroying private assets instead of its own because it can no longer “control” monetary policy by adjusting interest rates. Perhaps someone who is savvy enough to be the top central banker, like Ben Bernanke, realizes the inappropriateness of such a predicament and that he will never get out of the ZLB that way. Perhaps he is also savvy enough to realize that once policy has gone over such a cliff into a sea of very serious ethics problems, that perhaps the general policy is the problem and not the ZLB. Speaking for myself, I can say that what you are doing Mr. Bernanke is not worth the cost – ditch the deranged inflation targeting regime now or resign (actually I would prefer that you do both, but one or the other will do).