How do you make something as dull as inflation targeting sound interesting?
Make it into a reggae song…
‘High inflation, is a wicked thing.
And we must abolish it like slavery.
We want inflation low, so that we can plan and prosper.
But if it drop too low, we cannot grow.’
‘All that high prices that mean me harm,
they can go back where they came from.
No inflation monster, shall prosper.
So that middle ground is what you want.
Low stable and predictable inflation.
Cause low stable and predictable inflation is to the economy
what the bassline is to reggae music.’
Earlier this year the Bank of Jamaica launched a campaign for stable inflation in the form of a reggae.
You have to admit, it’s catchy.
In the last few decades Jamaica has been dealing with high inflation, with the worst hitting close to 80% in 1992. Also, with high debt. In 2012, debt to GDP hit close to 150%, which meant they were spending a lot to cover the interest on that debt.
But since this, Jamaica has managed to lower inflation, and debt.
The whole point of the campaign is to educate and to make it fun. But also, to promote confidence in the Bank of Jamaica.
The central bank wants to keep inflation stable, in the middle ground. Not too low, or not too high, but just right to promote growth. And confidence plays a big part in that, confidence that central banks and governments have our backs.
As I’ve written before with the case of Argentina, inflation and the economy can quickly get out of hand if people lose faith in the system or the currency. Our whole system is propped up through confidence.
One of the ways central banks and governments have been propping up confidence is through stimulus.
Like inflation, stimulus also needs the right equilibrium. Too much will inflate assets, which we have already seen in property and stocks.
Stimulus has been coming from many central banks in the form of lower interest rates. Also, in the form of quantitative easing. That is, the Fed bought trillions in government bonds and mortgage backed securities.
In the US, the US Federal Reserve has this year done a U-turn on rates from hiking to lowering. The Fed has slashed rates quickly this year to 1.50, which doesn’t give them much leeway in case of a recession compared to previous times, as you can see in the chart below.
We now seem to be reaching the end of the line with all that stimulus. We are not getting as much growth per dollar of debt.
Yet at a low 1.50 they still have one of the highest rates in the developed world.
Another source of stimulus lately has been the possibility of a US-China trade deal.
The US-China trade war has been destabilizing the global economy for a while now.
This week though, just as we thought we were getting close to an agreement, things once again escalated.
The US is talking about imposing tariffs on France to things like champagne and cheese in retaliation to their digital service tax.
The US also announced tariffs on Argentina and Brazil because their currencies have suffered mass devaluations this year. Devaluations that are a result of lower confidence, if I may add.
Argentina’s currency collapsed by 25% after a surprise election result back in August and has been trending even lower since. There has been a lot of turmoil in the Latin American region this year.
This week President Trump said he is in no rush for a trade deal with China either.
From BNN Bloomberg :
‘President Donald Trump signaled he would be willing to wait for another year before striking a trade agreement with China, casting doubt on the likelihood of a phase-one accord within weeks between Washington and Beijing.
‘“I have no deadline”, he told reporters Tuesday on London when asked if he wanted an agreement by year end.[…]
‘Trump suggested that in some ways, it might be better to wait until after the U.S. presidential election next November.
‘“I like the idea of waiting until after the election for the China deal. But they want to make a deal now and we’ll see whether not the deal is going to be right. It’s got to be right,” he said. “The China trade deal is dependent on one thing: Do I want to make it? Because we’re doing very well with China right now and we could do even better with the flick of a pen.’’’
But both the Fed stimulus and the possibility of a trade deal have so far seemed to be running against each other.
If things deteriorate, we may see a US-China trade deal.
With debt at record highs and risks mounting, we are playing a careful game of chess, pushing confidence to the optimal levels to avoid a recession.
But anything could pop this bubble. It’s a good time to prepare.
PS: The RBA is now considering negative interest rates.’ Click here to watch my interview with US economist and gold expert Jim Rickards.