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Friday, February 12, 2010 2:01 PM

Inflation Targeting Madness and Economically Illiterate Fools at the IMF

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You have to hand it to Keynesian fools, no matter how badly their ideas work out in practice, their theory is always the same, only more.

IMF chief economist Olivier Blanchard is the latest to prove he is an economically illiterate fool. Please consider IMF floats plan to raise inflation targets.

A staff paper co-authored by Olivier Blanchard, IMF chief economist, says the financial and economic crisis has “exposed flaws in the pre-crisis policy framework” and “forces us to think about the architecture of post-crisis macroeconomic policy”.

Suggestions include raising inflation targets from about 2 per cent to about 4 per cent so that monetary policy can better respond to shocks; automatic lump-sum payments for poorer families if unemployment rises above certain thresholds; exchange-rate intervention for smaller economies that depend heavily on trade; and giving central banks huge new regulatory tools so they can smooth the path of the economy.

Mr Blanchard said the idea of raising inflation targets should not be seen as outlandish. “If we had had more margin to play with on interest rates, we would probably have had to use fiscal policy less [in the crisis],” he told the Financial Times. He recognised that higher inflation and higher interest rates in normal times would have costs, but they might be a price worth paying because they would make monetary policy more effective in crisis periods.

“Nobody knows the cost of inflation – between 2 per cent and 4 per cent – so I think people could get used to 4 per cent and the distortions could be small,” said Mr Blanchard.
Inflation Targeting Madness

Taking property prices into consideration, inflation was running well over 4% in 2005-2006.

But Keynesian fools do not measure asset bubbles or housing prices. They only measure their distorted look at the CPI. By the time the Fed reacts to that, bubbles have already been blown and are about to implode.

Imagine Spain and Greece attempting to target for 4% inflation now. Hells bells, imagine the EU to do it in general.

One of the reasons the EU is in trouble now is its one interest rate fits all policy fueled massive inflation in Spain but not Germany.

Please remember that Bernanke is a fan of 2% inflation targeting. Bernanke helped blow the biggest credit bubble the world had ever seen. That bubble imploded. Now we have fools like Olivier Blanchard proposing the best way to deal with bubbles is to blow bigger ones so central bankers will have more room to react.

Blanchard's paper suggests giving central bankers “cyclical regulatory tools”, including bank capital ratios to limit or expand leverage, liquidity ratios to regulate liquidity, loan-to-value limits to control domestic mortgage borrowing and margin requirements to have some control over equities.

Good Lord. Does he want 4% inflation or not? And why should 4% be the target and not 6% or 8% or a factor of pi(π)? Is there a basis for 4% or is Blanchard pulling numbers out of his ass?

It is the height of idiocy to think Soviet Union style command economics works. But that is exactly what Blanchard proposes. He wants central bankers to control interest rates, inflation targets, capital requirements, domestic spending, and asset prices.

History has proven central planning to be the height of economic folly. It led to the collapse of the Soviet Union. Bernanke's 2% targeting led to the biggest credit boom and housing bubble in history, yet instead of seeing inflation and cheap money as the problem, Blanchard wants even cheaper money in the asinine belief "higher inflation would make monetary policy more effective in crisis periods."

My headline reads "Economic Fools at the IMF". In closing, let's be blunt. Blanchard is not a fool but rather a complete economic idiot.

Mike "Mish" Shedlock
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