Slipping and sliding
ROCKVILLE, MARYLAND — A slippery slope is what? A metaphor. An apparition. Something to avoid. A cliché, even.
Seven words that spell the global disaster called Inflation.
What is it exactly? You might say that it’s when prices rise. So what? Many things rise. The sun. Bread being baked. Balloons. We do not take offense.
But inflation is something else. God gave Moses the Ten Commandments. He added an eleventh. He gave it to the world’s central banks: Thou shalt target inflation at 2 per cent.
We know what happens to commandments. They get broken.
In the last century, there have been few instances of great inflation, so great that it was called hyperinflation. Inflation na, hyper pa. One was in Germany soon after WW I. Another was in the Philippines in the middle of WW II, when the occupying Japanese gave us ‘Mickey Mouse’ money. It’s happening today in Venezuela and Turkey. Why? The easy answer is because someone said something is Money, and people went along, and then another, who had the power, printed Money like there was no tomorrow.
But the madness ends. Because unlike a James Bond movie, Tomorrow does come.
Economists sometimes say Money is like a veil. It surrounds ‘real’ underlying transactions but it doesn’t matter if people can see through the veil. True enough. If we can anticipate that all prices will double, we just shrug and get on with our lives. After all the price we pay, someone else receives. Crazier economists then say that Money is then “neutral” — like “It didn’t mean a thing.”
Yet money is far from neutral. It is typically in Drive or Reverse. And there are winners and losers. This means that inflation is good for some, bad for others.
Economists, ever the wily lot, then say that there is a harsh ‘tradeoff’ for society. If we kill inflation, we get unemployment. (Some guy with initials AWP became famous for this so-called tradeoff.) That means a lot of losers (those who lose jobs) will prevent some winners (those who gain from inflation, such as those ‘evil’ debtors) from having fun.
The tradeoff spawned another thing called NAIRU. Wikipedia says it means “non-accelerating inflation rate of unemployment.” It is a mouthful, but the idea is that we have to accept some unemployment anyway, but not too much, and we don’t want inflation to ‘run away’ like a hesitant bride. It is the level of unemployment at which inflation will remain steady (although we have to turn to macroeconomics experts to tell us all this). Economists in the US think NAIRU is at 5-6 percent, but there is controversy on what steady rate of inflation will pair with such a NAIRU.
So, the ideal inflation rate that will not accelerate seems undetermined. Where did God then get the 2 percent inflation target?
Beats me. Someone in Canada (Louis-Philippe Rochon) says it came from nowhere but somehow it was popularized by the central bank of New Zealand. God, being God, cannot be questioned. Happy?
There’s yet another loose end here. Central banks print their own moneys, but are tied to each other like Siamese twins through the exchange rate, the price of one money in terms of another. In 1944, God also gave the 12th commandment: Thou shalt make exchange rates stable. He created that wonderful scapegoat of all God-fearing leftists, the IMF (Impossible Mission Force, or International Monetary Fund; take your pick).
The commandment is honored in the breach – “You know, exchange rates are determined by market forces, and for these to stabilize, we central banks must print money at more or less the same rate.” A rogue central bank risks unwanted exchange rate changes. Still, God did not command a particular level for the exchange rate. In 1944, the Philippine peso/US dollar rate was 2; we got PhP 2 per one USD. Today, the exchange rate is around PhP 58 to the dollar. God is so wise indeed.
How do we know that central banks are behaving as they should? We look at interest rates. When across currencies, they are the same, the market decrees that the exchange rate stay put. (For the serious economics student, this outcome has a name – the Interest Parity Condition.) When the US Fed (the US central bank) raises interest rates by 75 basis points, and our Bangko Sentral raises them by 50 basis points, can we say that the monetary officials of the two countries are willing to let the US dollar rise further?
We conclude. If the peso falls, it must be by design (not God’s). That design is also a moving target, just like the official inflation target. There is no excuse in that “It just happens.”
Whatever I say in this column is just musings from the dark side of macroeconomics. “Louis, this is the beginning of a beautiful friendship,” so said Rick.
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Author’s email: oroncesval4@gmail.com; Twitter: @ORoncesvalles
