Photo: Richard Sunderland on flickr
Dylan Grice is not a fan of the inflation targeting policies of central banks. Or any sort of targeting, really. The pervasiveness of “targets” used in economic policy — like central banks targeting inflation rates, governments targeting GDP growth rates, or even banks targeting specific rates of return on equity — is causing massive imbalances, according to Grice:
This is lunacy. How much damage has already been caused by banks that overreached themselves in trying to meet their RoE targets? How lopsided and capital destructive has China’s insistence on hitting its breakneck GDP growth targets at all costs been? How much of today’s painful credit deflation was caused by the credit inflation central banks pumped up while aiming for their CPI inflation target? In targeting these outcomes, underlying processes were distorted. Unforeseen outcomes resulted. But regulators continue to prescribe capital targets, banks continue to target RoE, China continues to target a growth rate, and central banks continue with ever more experimental methods in defence of their inflation targets. Indeed, today in Europe we’re seeing the unintended consequences of imposing outcomes (i.e. an exchange rate) on the eurozone economies.
Investors should likewise beware of targeting outcomes. Grice calls it a trap:
The thing is, Adam Smith and the Austrians didn’t fall into the trap of focusing on outcomes. And we’re trying to avoid that trap too. Warren Buffett said great baseball players watch the field, not the scoreboard.
That is how you get to number one. Grice adds at the end of his note:
Finally, an enormous thank you to those of you who voted in this year’s Extel Survey, and particularly for those of you who voted for Albert and me as the number 1 team, and Andy Lapthorne as the number 1 quant. On a personal level, I’d especially like to thank those of you who voted for me ahead of Albert. It means I get to call him “number two” for a year and order him around the office. It really does make the job worthwhile. Thank you again.