June 10 – 2021

No doubt Secretary Yellen yearns for a future when inflation in the US ticks along

at 2 per cent per annum, the economy is at full employment and real interest

rates back to 3 per cent. That is the vision of the future she likely had when she

was the chief advocate in the Greenspan Fed (back in 1997) of putting the US on

the 2 per cent inflation standard.

Professor Yellen would be the last person to recognise, let alone admit, that her

policy course was the origin of the first great asset inflation of the past quartercentury

(1996-2007), including its disastrous end. And subsequent perseverance

with the standard has meant a decade of low economic growth coupled with

resurgent asset inflation. Beyond the quarter-century of turmoil, she still

apparently believes in the stability and prosperity of her 2 per cent standard.

She will undoubtedly be instrumental in the search committee for a successor

to Chief Powell in finding a suitable replacement candidate who shares her views

and commitment. And there is the overriding political objective of victory in the

mid-term elections. This tolerance of inflation on the US side contrasts with a

Communist Party in China, which could be alarmed at the consequences for its

continued command by the present high CPI numbers even though on a balance

of risks, they may be transitory. This combination suggests that we should keep

our sights on Chinese developments in thinking about how global asset inflation

could reverse.