On the Failure of Ben Bernanke's Non-Standard Monetary Policies...
If you believe--as I do--that the overwhelming proportion of the effects of non-standard monetary policy at the zero nominal lower bound come from reducing short-term safe real interest rates by raising expectations of inflation, the failure of Bernanke's monetary policy to ever raise the average of 5, 10, and 30-year TIPS inflation break-evens above 2.5%--and its recent fall to 2.0%--demonstrates that Bernanke's policies have failed.
I tend to say that they have failed because they were tried only half-heartedly, and confusedly. And if Abenomics succeeds, I will regard that as strongly confirmed: I will then say we have three examples--Abe Shinzo, Franklin Roosevelt, and Neville Chamberlain--of successful expansionary non-standard monetary policy via régime shift, and another example of how half-measures and half-hearted policies do not summon the inflation expectations imp.
To put it another way, if we take the ten-year inflation TIPS breakeven as our expectation of inflation, then:
In June 2008, the core CPI stood at 215.5--with an expected core CPI as of June 2018 of 276.
In June 2009, the core CPI stood at 219--with an expected core CPI as of June 2019 of 264.
In June 2010, the core CPI stood at 221.5--with an expected core CPI as of June 2020 of 260.
In June 2011, the core CPI stood at 225--with an expected core CPI as of June 2021 of 285.
In June 2012, the core CPI stood at 230--with an expected core CPI as of June 2022 of 283.
And now, in June 2013, the core CPI stands at 233.5--with an expected core CPI as of June 2023 of 283.
Taking the five-year breakeven, right now the expected core CPI as of June 2018 stands at 257--compared to the 276 that it stood at in 2008. The Federal Reserve's monetary policies have thus either--depending on your taste--forced a 9.3% deflation relative to 2008 expectations of 2018 on the economy, or simply sat on its hands and dithered while the financial panic forced a 9.3% deflation relative to 2008 expectations of 2018 on the economy.
Has any other central banker ever presided over this big a hitting of a depressed economy with this big a brick for this long?
(The answer is: "Yes: Trichet and King, for two, plus the Great Depression itself and the BoJ in the 1990s.")
