When I was in junior high, my friend Scott had this Billy Crystal tape that we passed back and forth to each other. I still like Billy Crystal, but let's just say he was truly hilarious when I was 13 back in 1987.

He had this routine about old codgers who used to tell you how hard life was in the old days.

“We had no air…” he'd say, in an old man voice. “No food. We ate wool coats and we were happy.”

Then he'd project into the future when he would be an old man, talking about what it was like in the Sixties, about Woodstock.

“We closed down the New York State Thruway, we were crazy… hippie… bastards.”

Battling Deflation at Any Cost

Today's central banking world kind of feels like Woodstock to me. Lots of long hair, tie-dye, and perhaps a generous helping of body odor. Certainly hallucinogenics are involved.

Think about it. In the old days, as long as we could remember, the job of a central bank was to prevent inflation. Also, to promote economic growth and keep people in jobs, but they weren't really serious about that. The only thing they were really serious about was preventing inflation—and sometimes they did a bad job anyway.

But around 1980, central banks got religious about inflation and started to do drastic things, like raising interest rates. It worked so well that every couple of years they would raise rates again. As a result, inflation went down over time, to the point where it became a negligible factor in economic decision-making, which was the whole point of the exercise.

Well, with price stability achieved, there wasn't much left to do, but central bankers get paid too much money to sit around and stare at each other. And the one thing we learned over the last 20 years is that central bankers are only appreciated during a crisis, which is when they get to do stuff, whether it works or not.

So a new crisis was invented: Deflation.