Inflationary policies don't equal inflation

Glenn Stevens, Governor of the RBA, gave a speech this week at the annual dinner of the Committee for Economic Development of Australia (CEDA) (link attached for those who are interested). Afterwards he answered a number of questions, including the exchange below on whether global stimulus would lead to inflation. In his answer he raised a critical point, often forgotten - the inflationary impact of stimulus is relative. Whether or not inflation results depends on the counterfactual scenario.

Milton Friedman is probably right about monetary expansion always being inflationary. But if, in the absence of extreme global monetary policy, the world would be going through a large bout of deflation, then it needs to be, just to keep the central bankers heads above water.

The role of central bankers is to produce inflation. If the world, left to its own devices, would see, say, 3% deflation then they've got their work cut out for them. They've got to make up the 3% with inflationary policies before they generate any actual inflation.

Japan's central bank has been working at inflation for the last two decades without success. It has been stuck with deflation/low inflation and I wouldn't expect to see Tokyo filled with people pushing wheelbarrows full of yen bills anytime soon.

There's much talk in the press about global money printing causing inflation but all we really know for sure is that we will have a more inflationary world than we would have had otherwise. Whether that means 2% deflation instead of 6% deflation, or 5% inflation instead of 1% inflation, remains to be seen.

There are often references to Ben Bernanke's inflationary bonfire. But my mental image, when I think about Ben and his central banker mates trying to offset the global de-leveraging process, is of them trying to plug a burst Hoover Dam with a cork.

If the US economy gets kick started, inflation may well become something to worry about. But, until then, Glenn Stevens is probably right. Central bankers are being just inflationary enough to keep the deflationary alternative world at bay.