Does low inflation means ratcheting up of monetary stimulus - MUFG

Dr.Brendan Brown, Research Analyst at MUFG, explains that these days low inflation (meaning below central bank target) is hailed in markets as meaning a ratcheting up of monetary stimulus – therefore good for equities and other risk-assets whilst bad for the national currency.      

Key Quotes

“We have seen this Pavlovian experiment playing out for the US dollar in currency markets during recent months.  The fact that the central banks are determined to get their 2% target, rather than lowering this, should spread gloom amongst the payers of inflation tax – defined broadly to include not just the erosion of wealth held in the form of cash by actual inflation but also (and quantitatively much more important)  income loss on wealth held in government debt.  This loss stems from first, manipulation of interest rates to well below the level which would prevail under a sound money regime and second, unanticipated spikes of inflation by definition not incorporated in nominal rates.  (Across a wide spectrum of private debts including bank deposits, the revenue collectors are in the private sector).”         

“Of course in the conventional budget arithmetic there is no entry for inflation tax revenue.   But on a wide range of economic scenarios this is set to increase over coming years.   Budgets which are financed today at artificially low rates of interest and which are held down by revenues boosted by asset price inflation will metamorphosis into much more ugly phenomena.  A jump in inflation will very likely be the way in which the political system reacts so as to provide the continued government financing.   And there are not just the inflation tax revenues to consider here – but the knock on effects to real tax rates more broadly which can be camouflaged by nominal illusions.  (For example, the real effective rate of capital gains tax rises in a highly geared fashion on the inflation rate).”