The Chairman of the central bank of Thailand says that inflation targeting has no longer been effective.
From Businessweek/Bloomberg,
Bank of Thailand Chairman Virabongsa Ramangkura comments on inflation targeting. He made the remarks during a speech late yesterday in Bangkok.
Thailand’s central bank has used inflation targets since 2000 and aims to keep core inflation, which excludes fresh food and fuel prices, between 0.5 percent and 3 percent.
“Central banks should change their ideas. Inflation targeting is no longer effective because inflation has been globalized. The world is more open and we are a member of the World Trade Organization. Commodity prices are driven by global supply and demand, not policy of a particular country.
‘‘So monetary policy shouldn’t be used to deal with inflation because we can’t do anything. Monetary policy should be used to support economic growth and reduce unemployment, which we call inclusive growth.”
“The source of instability for emerging countries is foreign exchange, not inflation. The stability of the foreign exchange rate depends on capital movements. If our interest rates are higher than dollar rates, that will open a loophole for attackers. This creates financial instability. So, monetary policy should take care of this, not inflation.”
Virabongsa says his views run counter to those of Governor Prasarn Trairatvorakul.
Ineffective, here, represents euphemism for failure
In truth, central bank inflation targeting has failed and will continue to fail, not because of asymmetric levels of “foreign exchange rates that depends on capital movements”—which accounts for a verbal sleight of hand in order to shift the blame to the capital markets—but rather from the following:
1. Central banks don’t know where and how their interventions—via money printing—will end up.
2. Central banks cannot ascertain where exactly is the so-called invisible “equilibrium price level”.
3. Because they don’t know both 1 and 2, central bank inflationism leads to excesses which produces boom-bust cycles and raises the risks of intractable (consumer price) inflation
4. Most importantly, inflationism has always been about promoting the political interests of the political authorities and their cronies.
And political goals principally conflicts with economic reality. Example: repeated bailouts of crony firms end up consuming the capital of the economy. Long term has been sacrificed for the short term. Productive capital wasted on unproductive politically supported undertakings.
Yet bailouts, has been, and will be justified through the camouflage of economic technical gobbledygook called “aggregate demand”.
To quote economic professor Antony P. Mueller,
Inasmuch as central banks dominate the discourse about monetary policy, there is almost no debate going on about the thesis that inflation targeting is not only defective in guaranteeing monetary stability but that it also provided the conditions for the current financial crisis to happen.
The episode that was praised as the great moderation was a great delusion, which has become the nightmare of a long stagnation.
There is a vital need to establish a sound monetary system. Its consequence would be moderate deflation and the avoidance of extreme booms and busts.
The main barrier against sound money is neither intellectual nor practical but political. The resistance comes from the public sector because the chief casualty of an institutional change to sound money would be the modern inflated government along with its warmongers, debt pushers, and all the rest of the spin doctors of deceitful promises who form part of this kingdom.
Yes inflationism or “something from nothing” policies via central banks has essentially been grounded on the politics of the Santa Claus principle.
So whether viewed from the knowledge problem of centralized institutions or from political dimensions or incentives guiding the political authorities, inflation targeting have been destined to fail.
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