The Global 2 % Inflation Standard – How Will it End?

Abstract

The Greenspan Fed took the U.S. on to a 2 % inflation standard in 1996. Europe followed with the launch of the euro in 1998. Japan finally joined in 2013. This paper seeks to demonstrate how the standard has been responsible for three serious episodes of asset price inflation in the global economy and also for the unleashing of currency warfare on a scale not seen since the 1930s. Yet the global 2 % inflation standard at least superficially is well entrenched now with the IMF assuming yet another role for itself, guardian of the new monetary “order,” describing actions by its key members to boost inflation and devalue their currencies as “courageous.” The best prospect of over-turning the standard lies within the U.S. political arena but as yet the necessary forces there are weak and ill-formed. If the U.S. were to abandon the standard it would have to accompany this with steps to prevent Europe, Japan and China from waging currency war whilst sticking to the old monetary regime. In practice much of the world would choose to join a dollar standard once the U.S. abandoned the 2 % inflation standard in favour of monetary stability. A failure of the U.S. to break with the 2 % standard would not prevent other countries (most plausibly Japan or Germany) from abandoning it, but such a road would be arduous. In both types of break-up of the 2 % standard (U.S. led and foreign led) there could be a key role for gold, though this is not essential.