Adair Turner on Monetary Policy
Chris Giles at the FT has been looking at possible candidates to replace Mervyn King as Governor of the Bank of England after King’s term expires in 2013. Obviously, my first through was to find out whether any of them are hiding an inner market monetarist.
Adair Turner gave a speech about debt and deleveraging in November 2011. He considered the Richard Koo view, but some guy called Ben Bernanke won the day for him:
Well what is certainly the case is that previous major periods of deleveraging have often been accompanied by inflation above current typical target levels, and by buoyant growth in nominal GDP (Slide 24). Post-war Britain did not achieve a dramatic fall in the public debt ratio from 1950 to 70 by paying down nominal debt, but rather by achieving 7% growth in nominal demand, with 2.7% real growth combined with 4.3% average inflation.
And what is certainly also the case is that determined central banks can increase aggregate nominal demand, and create inflation or indeed hyper-inflation, if they buy government debt in sufficient quantity, and/or if they are willing to fund new public deficits with central bank money. That fact should not be in doubt, as Ben Bernanke has persuasively argued. Rather the pertinent questions are whether it is desirable to do so, and whether it is possible to select just the optimal level of inflation, or whether inflation is a somewhat binary phenomenon, either very low and stable, or potentially accelerating and very high.
Boom! Turner then discusses briefly the problems with tolerating higher inflation, going on to conclude:
The case for higher inflation targets or for price level targets is not therefore clearly compelling. But that conclusion is completely compatible with the belief that amid a deleveraging cycle it is vitally important to ensure that inflation targets are symmetric, that positive inflation is actually achieved and that, as a result, nominal aggregate demand and nominal GDP maintain a reasonable growth path. Japan’s path of nominal demand growth over the last 20 years, continued over the last four, has made aggregate economy level deleveraging (public and private combined) close to impossible (Slide 25). And the deleveraging challenge in the UK, US and Eurozone will become far more difficult, and potentially impossible, if aggregate nominal demand growth is not maintained at a reasonable pace.
Achieving that nominal demand growth, and hitting symmetric inflation targets of, let us say, 2%, may well in turn only be possible if central banks are free to use the full range of possible levers, including those of quantitative easing – i.e., temporary debt monetisation – which have been deployed by the Bank of England and the Federal Reserve.
Turner is focused totally on the importance of nominal GDP growth throughout the whole speech. Mr Osborne, here is your candidate for Governor – get this guy into Threedneedle Street pronto, and don’t wait until 2013.