Quote of the day: William White and inflation

Caroline Baum had a good column today at Bloomberg in which she suggests central banks consider asset prices in monetary policy going forward. In the piece she quoted William White, a former economist from the Bank for International Settlements. He said:

“The most calamitous downturns were not preceded by any degree of inflation. There was no inflation in 1873-74, in the 1920s, in the 1980s in Japan and in the 1990s in Southeast Asia.”

This is a very important historical point because central banks have been fixated on consumer price inflation for years as a result of runaway consumer prices in the 1970s. However, consumer price inflation and inflation are not the same thing. Inflation comes from increasing the money supply and increased credit.

During the 1990s and this past decade, there were a number of factors which suppressed consumer price inflation, the fall of the Iron Curtain and the integration of China into the global economy being the most important. As a result, increased money and credit found its way, not into consumer pries but into asset prices fueling several destabilizing bubbles along the way.

If central banks want to be more successful going forward they will need to heed Caroline Baum’s advice and start to consider asset prices as well.

Central Banks Can Do Better Than Just Mopping Up: Caroline Baum – Bloomberg

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