Inflation Targeting: What You’re Not Hearing about Ben Bernanke and How It Could Affect Your Portfolio
by Mark Skousen, Chairman, Investment U
Monday, August 28, 2006: Issue #576
How serious is Ben Bernanke about fighting inflation?
Very! “Inflation Targeting,” the policy of the new Fed under Bernanke, will affect your portfolio in many unexpected ways. And I have the inside scoop…
Two years ago, I joined the adjunct faculty at Columbia Business School, where I met Rick Mishkin at the weekly luncheons. You probably have never heard of Professor Mishkin, but Rick is an important figure. He’s a long-time colleague of Bernanke, and together they co-authored a book and several academic articles on the subject of Inflation Targeting.
Mishkin himself is a monetary expert, and is the author of the country’s #1 textbook on monetary economics (including seven pages on Inflation Targeting) called The Economics of Money, Banking and Financial Markets.
With two members supporting inflation targeting, Bernanke has a good chance of imposing his will on American monetary policy. And if he’s successful, it will impact stocks, gold and other investments. Here’s what to expect…
Bernanke’s Inflation Targeting Challenge: Copy New Zealand
First, here’s some background on Inflation Targeting and the evolution of Fed policy.
Up until the late 1970s, the Fed’s plan was to implement a “low interest rate” environment so that the government could easily finance its deficits.
For the next 20 years under the leadership of Alan Greenspan, the Fed switched back to a policy focusing primarily on interest rates – raising them to fight inflation, and cutting them to fight recession. Greenspan was largely successful, even though his Fed changed policies seven times during his 19-year reign (1987-2006).
Bernanke wants to change Fed policy again, and adopt Inflation Targeting, which would mean setting a numeric price goal (around 2% a year) for the public that the board would pledge to meet through its actions.
According to studies by Bernanke and Mishkin, countries that have adopted Inflation Targeting have seen their core inflation rates drop significantly:
- New Zealand since 1990
- Canada since 1991
- The United Kingdom since 1993
New Zealand, in particular, has been successful. Prior to inflation-targeting goals, its inflation rate varied from 10% to 15%. Now the CPI rate in New Zealand is less than 3% a year.
Bernanke wants to achieve the same goal in America. The problem is that inflation is now making a comeback, with oil and commodities rising sharply in an age of war and global uncertainty. The Consumer Price Index (CPI) rate has doubled in the past two years.
Remember the 1920s, when Irving Fisher – the premier monetary expert of his time – recommended Inflation Targeting as the best way to stabilize the economy. Prices were relatively stable in the 1920s, and Fisher thought everything was fine in the “New Era” economy.
As a result, he failed to anticipate the growing economic storm. He was wiped out by the 1929 crash and the 1930-33 depression.
Mark
Today’s Investment U Crib Sheet
- One way to make money regardless of Bernanke’s actions is to buy stocks that are moving independently of the broad market. These include companies that are accelerating their earnings, buying back shares, developing new products and – with uncertainty as high as it is today – are in a “recession-proof” industry. Alex Green, The Oxford Club’s investment director, identified one such “momentum” play this morning for subscribers to his Momentum Alert. Learn more about this type of investing and Alex’s trading service from The Oxford Club.
- The Fed Fund Rate Announcement & Interest Rate Decision
- Look Out for Lots of New Cheap Debt
- The Friedman Effect: Is Another Bear Market Around the Corner?
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