The Boom in Residential Real Estate in Toronto, Vancouver, and Sydney Far Outside the Commodity Producing Regions

These housing market issues become of particular relevance to small- and medium-sized economies under the regime of the 2% inflation standard.

The governments/central banks here face a particular dilemma, especially if there is an attractive narrative which could buoy speculative interest (carry trades) in their national currency. For example, a range of commodity producing and/or emerging market economies have found themselves during the present asset price inflation episode encountering huge demand for their still-positive interest rate monies. That narrative is sometimes rapid growth potential. And a sequence of capital gains on the related currency carry trade imparts positive feedback loops to still more participation in that. . . .

In the great asset price inflation of the present decade, policy-makers in a range of small- or medium-sized countries rejected following the defiant path of hard money. For example, Canada and Australia found their currencies under tremendous upward pressure in the first stage of the US monetary inflation as dollar depreciation and the China monetary boom drove the prices of their key commodity exports towards the sky. The central banks of both Commonwealth countries took the same tack—not allowing interest rates to rise in line with economic expansion fed by commodity export boom so as to contain the strength of their currencies. The result: a boom in residential real estate in the star cities (Sydney, Toronto and Vancouver) far outside the commodity producing regions. A lead narrative featured the flood of newly rich Chinese investors and occupiers of these. And though low, the interest rates had sparkled to a range of income-famished investors in the world outside, including European central banks and other sovereign wealth funds diversifying into these still-positive interest rate monies. Another feature of the monetary policies followed was the build-up of a consumer debt boom, in part taking advantage of the raised value of real estate collateral.

—Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), 140-142.

The Sovereign Debt Crisis in the European Monetary Union in 2010—12/13 Triggered Huge Demand for the Swiss Franc as Safe Haven

Both countries (Canada and Australia) remained loyal and committed members of the 2% inflation standard. And so did that once hard money country Switzerland. In the 1990s it slowly drifted away from its monetarist past and adopted an inflation-targeting regime, albeit not so laser fixated on 2% as was more broadly the case. The sovereign debt crisis within the European Monetary Union in 2010—12/13 triggered huge demand for the Swiss franc as safe haven, to which the Swiss authorities responded by massive foreign exchange market intervention, a spell of  fixing a ceiling to the currency, and ultimately a journey into an emergency negative interest rate regime which persisted for years. The big difference from the Australian and Canadian experiences was the massive foreign exchange market intervention and the adoption of radical monetary-easing measures—perhaps indicative of an even greater potential “overshoot” of the currency which might have occurred if the Swiss had held their hard money ground.

—Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), 142-143.

Japan Is the Battleground for Monetary Theorists; The Architects of the 2% Inflation Standard Can View Japan as a Laboratory Where the Most Powerful Non-Conventional Tools Have Been Deployed

And in looking further back, to before the journey started, the huge scope of the Japanese bubble and bubble economy in the late 1980s is a challenge to any serious purveyor of monetary or broader economic theory. Can this theory explain what happened and what went wrong in Japan? Our examination should also test any such theory in the story of Japanese deflation (itself largely myth rather than fact). The battle has been joined by sound money theorists drawing on Austrian School economics, who argue that Japan’s and indeed the globe’s economic outcome would have been much better if in fact there had been some period of declining prices.

We could describe Japan as the battleground for monetary theorists. The architects of the 2% inflation standard can view Japan as a laboratory where in recent years the most powerful non-conventional tools yet have been deployed. The Abe government was victorious in the political arena in terms of taking Japan on to the 2% inflation standard and in authorizing such tools. And at the time of writing, the world is basking in a stock market boom and global economic upturn in which Japan is fully sharing. Its apparent successes could be pyrrhic if indeed Japan adds to the evidence that the 2% global inflation standard is harmful to prosperity.

—Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), 96.

The Reserve Bank of New Zealand Led the Way to Formal Inflation Targeting Followed by the Bank of Canada, the Bank of England, and the Reserve Bank of Australia

A tiny country on the southern edge of the earth, New Zealand, led the way into formal inflation targeting, followed soon by Canada and the UK. Additionally New Zealand had a connection to a central part of the neo-Keynesian doctrine that featured backstage to inflation targeting—the so-called Phillips curve (an empirical relationship between inflation and unemployment which had its origin in the work of a once New Zealand war hero, later a professor at the London School of Economics). The inflation targets as determined by these countries were very much improvised and set by governments seeking to keep their central banks on course to lowering inflation rather than growing out of a considered economic blueprint for a new experiment in fiat money stabilization. Work on that had been going on for many years within the economics profession as we shall see—but the implementation of an inflation-targeting regime in a large economy was still some time away.

Specifically, in the New Zealand launch, the impetus came from a finance minister keen to make the central bank accountable in a transparent way for its actions—with the action plan to bring inflation down from a then high level (around 5%). In 1989 the Reserve Bank of New Zealand Act came into force. The Act established the operational independence of the Reserve Bank in respect of monetary policy and specified price stability as the single monetary policy objective. Simultaneously the Minister of finance and the governor signed the first Policy Targets Agreement which specified an annual inflation target of 0–2%. (3–5% target for 1990, with a gradual reduction into the 0–2% range by 1992 (changed to 1993).

Canada followed New Zealand. In February 1991 a joint announcement by the minister of finance and the governor of the Bank of Canada established formal inflation targets. The target ranges were 2–4% by the end of 1992 and 1.5–3.5% by December 1995. Subsequently the range was lowered to 1–3%. The Bank of Canada is not directly accountable to the government via formal sanctions if it misses its targets as in New Zealand but rather like the Reserve Bank of Australia is accountable to the public in general.

The UK was the next country to adopt formal inflation targeting, following that country’s exit from ERM in October 1992. The government set the target (initially 1–4%) and invited the governor of the Bank of England to begin producing an Inflation Report on a regular quarterly basis which would report on the progress being made in achieving the target. At the time of adoption, inflation was at 4%. The British inflation-targeting regime was similar in flexibility to the Canadian framework (and Australian which started around this same time).

—Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), 13-14.

Since the Fall of the International Gold Standard in 1914, the Fiat Money "System" Has Wandered through 4 Successive Stages of Disorder: 1914-31, 1931-68, 1969-85, and Mid-1980s to Present (2018-?)

Since the fall of the full international gold standard in 1914, the fiat money "system" has wandered through four successive stages of disorder. In each of these, we can identify the eventual emergence of a "stabilization experiment." The first three all ended in dismal failures, sometimes catastrophic. Either the experiment was deeply flawed or halted prematurely or both. The present--the fourth--is headed in the same direction, driven by essential flaws in concept and implementation. We call this last the "global 2% inflation standard." It could not have been introduced at a worst time. The main uncertainty is whether it will come to an end in an asset price deflation shock, or a goods inflation shock, or both. Then there will be the fifth stage of disorder. Question: could the fifth stabilization experiment, if and when it emerges, be more successful than the previous four? That is running ahead of our story. Let's go back to the beginning.

--Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), Kobo e-book.

Experiments in Economic Crash Postponement: 1927/29 Versus 2016/18

History does not repeat, it echoes. At the time of writing (early 2018), it seems like there have been strong echoes in an “Indian summer phase” of global asset price inflation through late 2016, in the whole of 2017, and into early 2018, from Wall Street in the late 1920s. That earlier episode culminated in a devastating sequence of financial crashes. The danger of a repeat is widely evident, although the Federal Reserve has taken a crucially different policy step from back then. And in broader context, we should note that in the late 1920s, the world was barely ten years on from the World War I (a point emphasized to the author by Alex J. Pollock and also found in Kindleberger’s summing up of the causes of the Great Depression).

The echoes stem from an essential similarity in monetary circumstance. After the Great Recession of 1920–21, the recently created Federal Reserve (doors opened in 1914) embarked on a course of fighting “deflation dangers” whilst countering incipient cyclical downturns. Fed policy-makers were in part responding to contemporary criticism especially as voiced in Congress to the effect that their mismanagement had contributed to the severity of the Great Recession (too slow to halt inflationary policies once war ended and then excess zeal to bring prices down).

The technological revolution unfolding in the 1920s (mass assembly line, electrification, autos, radio, etc.) meant that prices had a natural and benign tendency to fall. The Fed, in resisting this, kept monetary conditions very easy, fostering a powerful asset price inflation which encompassed the market in stocks, real estate, and foreign loans (most of all to Germany). Similarly, in the aftermath of the 2000–02 economic downturn and equity market bust (led by Nasdaq), the Fed turned to “fighting deflation” despite a benign tendency at that time for prices to fall (economic weakness, globalization, a continuing productivity spurt reflecting the IT revolution). The fight against deflation was waged with much greater vigour following the 2007 panic and Great Recession despite a natural rhythm of prices downwards, now due to globalization, digitalization, and economic weakness, rather than any apparent productivity surge.

--Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), 165-166.