Presidential Rivals: Drop the 'One Percent.' Trumpet the 'Negative Four Percent.'

By: Fred Sheehan | Thu, Jan 12, 2012
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Frederick Sheehan will be interviewed on "The Larry Parks Show," Thursday, January 12, 2012, from 7:00 to 7:30 PM, on Time Warner Channel 56, RCN Channel 83, and Verizon Channel 34.


Here is a topic begging for a presidential candidate's attention. It is simple to explain and to understand. The White House hopeful should grab the baton from the weary "one percent" couriers. In its place, "I'll stop those negative four percenters," will shine with "a cross of gold" in America's heritage. The "one percent" is a vague call-to-arms since it is not clear where the disenchanted should concentrate their energies. The "negative four percent" is directed at a single source.

An outline of what follows: First, will be an explanation of the negative four percent. Second, a look at the gestation of Inflation Targeting. Third, the constitutional question: is such an adoption within the authority of the Federal Reserve System? Fourth and finally, will be comments behind closed doors by Federal Reserve officials of whether the Fed should receive authorization by Congress for Inflation Targeting. A preview: on the whole, participants thought it would be best not to open this can of worms before the legislators. A future episode will explore the comments of four former Federal Reserve chairmen who either are (or were) enemies of such a leap into academic abstractions.

The formula follows. The Federal Reserve is rumbling towards an official "Inflation Target." On January 5, 2012, St. Louis Fed president James Bullard told Bloomberg radio: "I think we're very close to having inflation targeting in the U.S. This may be an opportunity to get something done that everyone on the committee can rally around."

Regular readers know the story behind the story. (For instance, see The 8% Solution and Who Am I? What is Money? The Fed is Here to Help. Federal Reserve Chairman Ben S. Bernanke is the partial author of Inflation Targeting: Lessons from the International Experience.

Inflation Targeting (not normally capitalized, but it needs celebrity promotion) is a toy with which a central bank picks an inflation rate out of the air. The People are then subjected to a race against inflation. The rate might be any single-digit number other than zero. (Purists may claim zero is not a number, but this is a political campaign.)

Only two variables need to be explained and understood by the public. One is the interest rate; the other is the inflation rate. Put together, the Federal Reserve is vectoring towards an official policy of reducing Americans' personal wealth by four percent each year.

In fact, this Fed would hold short-term rates at zero forever, if the real world allowed it. Its policy permits no one in the United States to save. It would still be possible to retain one's savings and accumulated wealth with a zero-percent inflation rate. However, the Fed is about to instate an official policy of inflating prices and devaluing the dollar.

The inflation rate chosen for this presidential campaign is 4%. Thus, zero percent of interest earnings and 4% inflation equals a confiscation of 4% of American's personal property - compounded - each year.

Why 4%? The Bureau of Labor Statistics' consumer price index (CPI) is around 3.5%. There is no reason to insist on precision with the campaign slogan. According to John Williams of Shadow Government Statistics, if the BLS used the same methodology to calculate the CPI that it used in 1990, it would be over 7%. If the BLS used the same methodology that it used in 1980, the CPI reported by the media today would be 10%.

A different John Williams, this one is President of the San Francisco Fed, and, as of January 2012, a voting member of the FOMC, has publicly proposed an Inflation Target of 4% (See: Heeding Daedalus: Optimal Inflation and the Zero Lower Bound). He is the Fed's new poster boy.

Wall Street Journal reporter Jon Hilsenrath wrote a profile of John Williams (of the San Francisco Fed, not Shadow Government Statistics) in the January 9, 2012, edition. Hilsenrath relays the Fed's publicity releases to the public through the Journal. The "brainy" San Francisco Fed president "might consider an inflation objective even higher than 2% under some circumstances." This hardly does Williams justice. He has already proposed going much higher, but it apparently is not yet time to break that news.

Even more unsettling is the Federal Reserve's decision to pursue Inflation Targeting without review. How did it receive authority to construct a policy of currency debasement? Section 8 of the U.S. Constitution states: "Congress shall have the power... to coin Money." Leaving aside Congressional dereliction of said Section, the Federal Reserve is pursuing its confiscatory policy by stealth.

What follows is an unusual opportunity to read Fed officials' honest reasons (behind closed doors) for violating institutional checks-ands-balances. Inflation Targeting was the topic of discussion at the February 1 and February 2, 2005, FOMC meeting. In summary, they veered towards importing Inflation Targeting on the sly.

This is such a ripe topic for an ambitious candidate. It's on record. It is easy to understand: just a "0" and a "4." Americans know, or at least sense, they are being abused. A candidate can direct energies to a single, concrete source.

Vincent Reinhart, then a Federal Reserve staff economist, now at some think tank, presented "Considerations Pertaining to the Establishment of a Specific, Numerical, Price-Related Objective for Monetary Policy." Reinhart broached the question: "Should the inflation goal be decided by the Congress (presumably through the process of amending the Federal Reserve Act) or by the Committee?" Reinhart presented the pros and cons. One con: "In particular, is the Committee comfortable in seeking amendment to the Federal Reserve Act? Reopening the act could lead to other changes that the Committee might not welcome...."

Reinhart later added: "[A]n inflation target should be delegated to a conservative central banker. That seems to have been the equilibrium worked out over time, and you might not want to perturb that equilibrium now." Compromise of what, with whom, and the equilibrium not to be perturbed were not discussed. Let's take a guess since the period between 2005 and 2012 needs to be addressed. The Fed and Congressional oversight committees have reached a "see no evil, hear no evil, speak no evil" accord. If true, this is fertile ground for a candidate. If false, it is still fertile ground since the overseers are derelict.

Board member Ben Bernanke thanked the staff for its pro and con discourse. (Alan Greenspan would be chairman until January 2006.) Bernanke regretted it "was difficult to get precise empirical evidence on...whether or not low inflation is good in the first place." [Editor's note - This question was asked by the "conservative central banker" about to run amok bespattering America with his college thesis. - FJS]

Chairman Greenspan put an end to this silly distraction, stating that low-inflation and "sustainable long-term growth" are "as close to a generic macroeconomic principle that we can have." [Editor's note - The non-academic chairman had to waste his time telling the former head of the Princeton University economics department, who loves to remind audiences: "I am a macroeconomist rather than a historian," of the "the most generic macroeconomic principle that we can have." - FJS] [From the editor who won't stop butting in - The specific "macroeconomist/historian" quote just cited comes from page six of Ben S. Bernanke's Essays on the Great Depression. The professor wanted it understood up front that he has no patience or time for the history of the Great Depression. - FJS]

Janet Yellen, president of the San Francisco Federal Reserve (at the time; she is now vice chairman of the Federal Reserve System), thought the Fed could slide Inflation Targeting in the back door. In Yellen's words: "augmenting the status quo" could be pursued by "very carefully crafted language" from a 2003 speech by Federal Reserve Board member Ben S. Bernanke. Yellen's suggested course (in her mind) would explain "to the public why the Committee endorses an inflation objective that actually differs from true price stability." [Italics added - FJS.]

It is worth tucking that sentence away. It is not likely we will read another admission from a central banker that Inflation Targeting is a different species from "true price stability." Congress has established a mandate for the Federal Reserve to maintain "stable prices." Yellen made it crystal clear that the Fed ignores "true price stability."

Mark Olson, president of the Fed's Atlanta branch, was leery of telling Congress the FOMC was adopting Inflation Targeting in its mandate. Olson thought "if we tinker with any element of the Congressional mandate, we would do so at our peril." Olson told his cronies that when he went through his confirmation hearing in 2001, "at least one member of the Senate informed us that if they opened up the Federal Reserve Act, he would want a mandate that zero inflation ought to be the law."

Chairman Greenspan spoke, as was his wont, after all FOMC members had their say: "[T]he political issue bothers me a great deal." He did not say why. Possibly, he looked upon the day's discussion as exploratory in nature. He had less than a year remaining as chairman, so knew Inflation Targeting was a decision for the next chairman. Greenspan discussed operational problems of Inflation Targeting. These will be quoted in the next episode: discourses by former Federal Reserve chairmen about Inflation Targeting.


Frederick Sheehan writes a blog at



Fred Sheehan

Author: Fred Sheehan

Frederick J. Sheehan Jr.

Frederick J. Sheehan

Frederick J. Sheehan Jr. is an investor, investment advisor, writer, and public speaker. He is currently working on a book about Ben Bernanke.

He is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and co-author, with William A. Fleckenstein, of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve (McGraw-Hill, 2008). He writes regularly for Marc Faber's "The Gloom, Boom & Doom Report."

Sheehan serves as an advisor to investment firms and endowments. He is the former Director of Asset Allocation Services at John Hancock Financial Services where he set investment policy and asset allocation for institutional pension plans. For more than a decade, Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for John Hancock clients.

Sheehan earned an MBA from Columbia Business School and a BS from the U.S. Naval Academy. He is a Chartered Financial Analyst.

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