Have central bankers picked the wrong target?

Some of you may have seen the recent story on all the $100 notes that have been taken out of circulation. Peter Mair, previously of the RBA, blames pensioners but I can't help thinking that a world of extreme monetary policy isn't helping either.

With politicians and central bankers playing a game of 'how low can we go' when it comes to interest rates, it is possibly only a matter of time before this becomes a bigger issue than just a few $100 notes sitting under a pensioners mattress. This got me wondering just how little central bankers understood about the implications of their policies and reminded of a speech given recently by Mervyn King, Governor of the Bank of England, on the whole question of inflation targeting.

[For those wondering about the dates, I only came across the $100 note story yesterday!]

I will leave it to those who are interested to read the paper, but his basic question is whether we might have paid too high a price for our obsession with inflation? Should we possibly have thought a little more about financial stability?

Personally I would have included an even simpler question: Was an inflation target of 2 to 3% (the popular choices) far too high in a world of rapidly expanding credit? (Did they simply get the number wrong?)

When credit is flowing, interest rates low and risk forgotten, any amount of inflation could be seen as an invitation to gear up and get giddy speculating on asset prices. Perhaps a 0% target was a better choice? (I can just see Alan Greenspan saying 'doh' in his best Homer Simpson voice).

Unfortunately Mr King just raises questions and issues a call to arms to junior financial types, rather than making any tough recommendations. And he certainly doesn't pause to ask the question whether low inflation could still be too high a target.

I wish I was able to attend the speech. I would have loved to ask the question 'Mr King. You seem to have gently suggested that inflation might not have been exactly the right target. But, more fundamentally given they are more or less running the world economy, do you think central bankers have the slightest idea what they are doing?'

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