Wednesday, August 25, 2010

Jim Rogers Is Wrong

Maybe its his Asian perspective, since he’s based in the East now, but calling for interest rate hikes in the developed world is about on par with implementing fiscal austerity in a recession…oh, wait, they’re doing that too:

Rogers Says China, World Should Raise Rates in Inflation Fight

China and other global economies should increase interest rates to contain a surge in inflation, said investor Jim Rogers, chairman of Rogers Holdings.

“Everyone should be raising interest rates, they are too low worldwide,” Rogers said in a phone interview from Singapore. “If the world economy gets better, that’s good for commodities demand. If the world economy does not get better, stocks are going to lose a lot as governments will print more money.”

This makes sense, but only in the developing East where inflation is definitely creeping up. It makes no sense in the developed West, where the recovery is slowing rapidly and markets are pricing in deflation, not inflation.

This all of a piece with the flawed “hyperinflation” thinking I wrote about yesterday – just because central banks are printing money and interest rates are historically low, does not necessarily imply policy is too loose.

All this has Scott Sumner freaking out:

Nick Rowe’s wall and the Great Recession

...The Fed needs to raise NGDP growth by some method other than lowering nominal rates. It is up against the wall. That means they need some other policy tool. It might be the printing press (QE), negative IOR, price level or NGDP targets, dollar devaluation, etc. But it can’t be done by manipulating the fed funds rate. And for some reason the Fed seems paralyzed.

I guess because I have spent my whole life studying unconventional policy tools, and because I never favored interest rate targeting in the first place, these alternatives don’t seem at all scary to me. FDR created inflation when he raised the price of gold. And the inflation basically stopped when he stopped raising the price of gold. Excluding WWII, no one has ever overshot toward high inflation coming out of a zero rate trap. That’s why Krugman and I can have such serene confidence that the inflation scare-mongers will be proved wrong. I’ve seen this movie already. Several times.

Because deflation make rates low, and leads to cash and reserve hoarding, it makes money seem really loose when it is actually very tight. Fed officials currently argue that money is very loose. They are wrong, but that’s what they think. Now we need to convince conservative central bankers, who are devoted to price stability, to take what seems like ultra-loose monetary policy, and make it far looser. The thought makes me despair. That’s why it is so tragic that Milton Friedman died in late 2006. He was a voice that central bankers would listen to. He was a respected conservative. An inflation hawk. Regarding the Japanese malaise, he said:

“Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

. . .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

That’s right Dr. Friedman, it’s just too counter-intuitive for people to accept. And that’s precisely why we are fated to suffer through the Great Recession. It’s a real pity.

He has more to say on the subject here and here. Some background: Scott Sumner is a right-wing conservative libertarian, Paul Krugman is a left-wing liberal Keynesian – the fact that they can even agree on this subject tells you how off base expectations of inflation actually are.

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