For the first time in a very long time, central bankers are coming under friendly fire as they lose control over some of the economic forces they themselves have helped to generate.
The UK economy, even by today’s general standards, is in a world of pain. This is due to a slew of reasons, from the fallout of unfinished Brexit to the ongoing impact of pandemic-induced lockdowns to the war in Ukraine and the West’s backfiring sanctions against Russia. The latest data suggest that UK growth will turn negative this quarter while inflation, already at a 40-year high of 9%, is expected to break into double figures some time soon. The high street is dying a long, slow death while manufacturing is still 2.2% smaller than it was pre-pandemic.
Bank of England “Wrong Again”
The Bank of England has warned of a looming high-inflation recession, otherwise known as “stagflation,” which threatens to push millions of families deeper into poverty and tip many cash-starved businesses into bankruptcy. The bank’s Governor Andrew Bailey recently warned of a “very real income shock” due to soaring energy prices and “apocalyptic” food prices. As the desperation grows, people are understandably looking for someone to blame. Some are pointing their finger at the Bank of England itself. In an article on Monday, the Daily Telegraph wondered how the BoE could have got it “wrong, again”, on Britain’s slide towards recession:
The bank had thought the economy would still be growing, albeit weakly. In its downgraded forecasts last month, officials predicted the UK would eke out growth of 0.1% this quarter, with a contraction only taking hold at the end of this year after October’s expected 40% rise in the household energy price cap.
Instead, analysts now think GDP will fall this quarter by between 0.5% and 0.7%. It marks a significant shift in expectations over a very short space of time.
This is not the first time the Telegraph has shone a light of the BoE’s recent failings. On May 28, Tim Wallace lambasted Andrew Bailey and the BoE for failing to heed warnings over runaway inflation. Some of those warnings had been raised internally within the bank but went unheeded:
By February 2021, the Bank’s forecasts showed the tiniest bit of inflation and predicted it would stand at 2% today.
Andy Haldane. then the Bank’s chief economist, flagged that risk prices might not behave, calling inflation “a tiger… stirred by the extraordinary events and policy actions of the past 12 months.”…
In May 2021, Haldane voted to end QE early. Looking back, he says risks to inflation were “balanced fairly and squarely to the upside,” with demand unleashed into a world of limited supply. “The laws of economic gravity had not been suspended.”
But Haldane was outvoted. “It would have been nice if I could have convinced [the] eight others around the table.”
Haldane’s was a lone voice that was drowned out by the prevailing consensus that inflation was only transitory. Once Haldane left the BoE to become chief executive of the Royal Society of Arts in June 2021, only two other BoE members ever voted to curtail QE, notes The Telegraph. A month later, the House of Lords’ Economic Affairs Committee, whose members include former BoE governor Lord Melvin King, was calling QE “a dangerous addiction” and asking the Bank to explain “why it believes higher inflation will be a short-term phenomenon.”
The Bank of England is not the only central bank being brought to task for losing control over the economy. In an article published last week in Project Syndicate, the economists Willem H Buiter and Anne C. Sibert warn that major central banks “have lost the plot when it comes to fulfilling their price-stability mandates.” Both the Federal Reserve and the Bank of England have done too little, too late to bring inflation under control, the authors argue.
“Be Happy” for Inflation
It’s worth bearing in mind that central banks have been trying their damnedest since the Global Financial Crisis to create enough inflation in order to gradually inflate away the debt, but perhaps not on the scale we are seeing today. A perfect reminder of this now somewhat inconvenient fact is an article by Reuters’ chief correspondent Balazs Koranyi from October 2021, which insisted that the return of inflation is a victory, not a defeat, for central banks.
Yes, inflation is back, and you should probably be relieved if not outright happy.
That is the verdict of the world’s top central banks, who hope they have hit the sweetspot where healthy economies see prices gently rising – but not spiralling out of control.
Backed by vast government spending, central bankers unleashed unprecedented monetary firepower in recent years to get this result. Indeed, anything less would suggest the biggest experiment in central banking in the modern era had failed.
Only Japan, which has been trying and failing to heat up prices since the 1990s, remains in the inflation doldrums.
For the other advanced economies, a rise in price pressures puts the elusive goal of unwinding ultra-easy policy within sight and at last raises the prospect that central banks – thrust into prominence during the global financial crisis – could finally step back.
The current inflation rise is not without risk, of course, but comparisons with 1970s style stagflation – a period of high inflation and unemployment combined with little to no growth – appear unfounded.
Of course, back then inflation was “just” 4.2% in the UK, 6.2% in the US and 4.1% in the EU (compared to 9%, 8.5% and 8.1% respectively in May). Now, fears are rising that central banks will not be able to tame the inflationary forces they have partly unleashed, at least not without causing huge economic pain, dislocation and destruction in the process (which some might say is actually part of the plan).
Central Banks “Failing Yet Again”
In late May, Politico‘s Opinion Editor Jamie Dettmer unleashed a salvo of criticism in his article, “Central Banks: Too Big to Fail, But Failing Yet Again“:
The price increases for goods, rent, food and energy were one-offs, so the argument ran. Simply the consequences of economies struggling to recover from the induced coma of COVID-19 lockdowns and restrictions. But now, with inflation reaching 40-year highs, and the specter of stagflation looming, central bankers are coming under sharp criticism for their complacency.
And the ferocity of the attacks on bankers, as well as the prominence, influence and political variety of their critics — ranging from left to right — all suggest this is no squall but a tempest, which may have enduring consequences for the governance of central banks.
So far, critics say that by not raising interest rates sooner, the banks have failed to act quickly, or boldly, enough to restrain surging prices, and they should have quickly turned back from quantitative easing, which was used to inject money into their economies.
Some argue that the prime pumping wasn’t necessary, that increasing domestic money supply has become an addiction for central banks since the 2008 financial crash — one they have been unable to wean themselves off.
And the criticisms are only getting rougher and louder, with some foes saying it is high time central banks were rethought, reformed and pulled back under more political control, where they could at least be held democratically accountable…
Writing in POLITICO Europe last week, former chief economist and board member of the European Central Bank (ECB) Otmar Issing fired a broadside at central banks — the ECB included — for having placed themselves “in the ‘transitory camp,’ expecting inflation to return to prior low levels via self-correction, so to speak, seeing no need for action to counter the risk of higher inflation.”
“Probably one of the biggest forecast errors made since the 1970s,” he lamented.
Of course, today’s inflationary forces are not solely being driven by central banks’ dogged application of ultra-loose monetary policy. A dizzying constellation of supply-side factors, including the shocks caused by ongoing pandemic-induced lockdowns, the war in Ukraine and the ratcheting sanctions against Russia, have played a major part, as too has corporate profiteering.
As Servaas Storm documents in his excellent article, What Is Really Causing Our Inflation: “Inflation in a Time of Corona and War”, which Yves cross posted on NC last week, corporations have used their pricing power to raise their profit margins to the highest level in 70 years:
Nominal growth of corporate profits (by 35%) during 2021 has vastly outstripped nominal increases in the compensation of employees (10%) as well as the PCE inflation rate (6.1%). Using inflation as an excuse and helped by algorithmic pricing and AI, mega-corporations are choosing to raise prices to increase their profit margins – and they hold enough market power to do so without fear of losing customers to other competitors.
Corporate profiteering is contributing to the inflation problem. According to The Wall Street Journal,nearly two out of three of the biggest US publicly traded companies had larger profit margins this year than they did in 2019, prior to the pandemic (Broughton and Francis 2021). Nearly 100 of these corporations did report profits in 2021 that are 50 percent above profit margins from 2019. Evidence from corporate earnings calls shows that CEOs are boasting about their “pricing power,” meaning the ability to raise prices without losing customers (Groundwork Collaborative 2022; Perkins 2022). Even the Chair of the Federal Reserve, Jerome Powell, has weighed in on this issue, stating that large corporations with near-monopolistic market power are “raising prices because they can.”
Given that many of the forces driving inflation, including supply chain bottlenecks, labor shortages and geopolitical tensions, are beyond the control of central banks anyway, hiking rates will probably do precious little to actually tame inflation, while at the same time exacerbating stagflationary conditions by squeezing yet more life out of the economy. It’s not as if central banks have a strong track record of taming inflation. As Storm notes tartly, a close look at the past record of monetary tightening shows that the Fed has hardly ever managed to guide the economy to a soft landing with interest rate increases.
A key reason is that small interest rate hikes do not reduce inflation (at all). It takes large interest rate hikes, but those come with massive collateral damage to the real economy—and this collateral damage might well be larger than the damage done by allowing inflation to remain high for some, while actively managing its consequences (especially in terms of the distribution of incomes).
One central bank that is finding it particularly hard to manage the consequences of high inflation is the European Central Bank, which hasn’t even begun to hike rates yet. Like many central banks, it insisted that inflation was transitory. Like many central banks, it has painted itself into a corner. Unable to raise rates persistently above the prevailing inflation rate without causing huge amounts of economic pain and market stress, all they can do is gently move rates up, which will not reduce inflation at all. As the financial analyst Lyn Alden notes in a recent newsletter, the ECB has the hardest job of all:
This was very apparent in the head of the ECB Christine Lagarde’s recent interview.
She was asked, “how will you get the balance sheet down?” while being shown the ECB balance sheet on a screen.
Chart Source: Trading Economics
She answered, “It will come. It will come. In due course, it will come.”
The interviewer paused, confused, and then asked, “…how?”
And she answered, “In due course, it will come.” And then smiled.
She offered no answer, no description, no clarification, and had rather awkward expressions throughout the exchange.
This is because, like most central banks, there is no plan. It won’t come. Sovereign debt will be monetized to whatever extent it needs to be, or it’ll collapse. And for the ECB it is particularly tough, because they have to monetize debts of specific countries more-so than other countries.
The fact the Euro Area has a monetary union but no fiscal union means that public debt is mainly held at the individual country level but each individual country does not have an individual central bank with unilateral base money creation ability. Instead they have the ECB, one of whose functions in recent years has been to monetize the sovereign debt of struggling economies on the periphery. Thanks to its purchase of trillions of euros of Euro Area sovereign bonds, including more than €750 billion of Italian bonds, the central bank has been able to keep the yields on those bonds in check.
But now that the central bank is winding down its asset buying program while talking about the possibility of hiking rates, investors are selling off peripheral bonds. As a result, the so-called “risk premium” between German and Italian 10-year yields, which is seen as a measure of stress in European markets, has surged to its highest level since May 2020, at the height of the virus crisis. In other words, markets are becoming increasingly spooked about the ability of Italy to repay its debts, given that the biggest buyer of its bonds is about to leave the market.
As CNBC notes, ECB officials’ failure to provide any details about potential measures to support highly-indebted nations is adding to investors’ jitters. On Monday, Italy’s 10-year bond yield surged to 4% — a level not seen since 2014. Yields on Spanish 10-yield bonds are also at an 8-year high while those on Portuguese and Greek bonds are at their highest level since 2017.
To compound matters, commercial banks in Europe hold individual sovereign debt as an integral part of their collateral. When the value of that debt falls, the size of the banks’ capital buffer also falls. In Italy lenders remain large holders of Italian debt despite recent efforts to diversify portfolios and soften the impact of price swings. Banks are also exposed to Italy’s economy, where higher borrowing costs will further squeeze companies and consumers already grappling with record-high energy prices.
Against this backdrop, central banks like the BoE and the ECB have become fair game, even in legacy media outlets that have spent the past two decades virtually idolizing them. For the first time in a very long time, central bankers are coming under friendly fire as they lose control over some of the economic forces they have helped to generate.
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Blaming game all over again? All in all they are just another brick in the wall. When you choose to blame the BoE as if it was an independent thing when they are only another function or tool of the Power the important thing is what you are setting aside. The Daily Telegraph must be expert on this game, and another tool itself.
Wasn’t the deal supposed to be that democratic nations cede enormous power to central bankers and in return they would get a good economy (though Main Street and Wall Street define this very differently) and rising asset prices; which for most is rising home values. Instead, they keep mucking it up, roll from crisis to crisis and the PMC now argues to give them even more power. Yeah right.
Every time I see this happen, which is all too often, I harken back to the book “Lords of Finance” or how four central bankers broke the world. There comes a time when Humpty Dumpty falls of the wall and no amount of tape and glue can put him back together.
Depressing!
Central bankers have engaged in massive mission creep yet at least in the US have dropped one of their former major duties, financial regulation. Big bank supervision is a joke.
I recall being utterly appalled but not entirely surprised when I read in a May 2000 Wall Street Journal article that Alan Greenspan was spending his own and young Fed economist time (as in the best new economics grads in the US) figuring out what drove the stock market. The stock market was never the Fed’s job! Because the Great Depression reforms limited stock market leverage, neither the 1987 crash nor the dot com bust did financial-crisis type damage.
In addition, administrations were increasingly willing to cede responsibility to economic management to the Fed. Better designed policy would explicitly use a lot of automatic stabilizers, so that fiscal spending goes up automatically when times are bad and declines when times are good.
Instead, the Fed attempted to goose demand after the crisis using QE to create a wealth effect. At least Bernanke was clear about that even if nobody paid attention. QE was to lower mortgage rates by lowering both Treasury bond yields and mortgage spreads over Treasuries. Lower mortgage rates = higher housing prices = lower big bank writedowns on second mortgages. It also did produce some more consumer spending via refis giving some households more to spend and via the wealth effect.
The Fed had also worked out by 2012-2013 that super low interest rates were not simulating demand but were producing economic distortions, like a lot of leveraged speculation. But they didn’t admit that publicly. But when Bernanke tried backing out of ZIRP-y policies in 2014, he lost his nerve when he set off the so-called taper tantrum.
The post crisis period showed more generally that making money expensive can kill economic activity, but making it cheap does not stimulate activity save in sectors where the cost of funding is one of the biggest costs, so the sectors that benefit are rentier activities like banking and real estate speculation, as opposed to the general economy.
Yes, and I think your third paragraph is worth stressing.
The Fed was in the business of goosing demand to make up for the loss of purchasing power caused by the offshoring of so many relatively well paid manufacturing jobs. The result was debt and a fractured middle class, when it would have been so much more productive to embark on a broad infrastructure rejuvenation program.
Actually I think it’s the 1st sentence in the 4th paragraph that should be stressed…
“Instead, the Fed attempted to goose demand…”
How does the FED goose demand? It drops interest rates to entice the PRIVATE sector to borrow to spend in the real economy (and speculate in the financial economy). This “gooses” the economy at the moment but ALSO increase total PRIVATE debts which increases overall financial fragility. Do that enough times and you create the environment for a financial crisis especially because you’re also inducing financial speculation at the same time your increasing financial fragility. That gamble only works so many times or for so long.
I don’t disagree, although it is the act of ceding responsibility that started the process.
Today I increasingly think in terms of “fragility”. A complex but robust system is unpredictable, which is why economists perform so poorly, but a fragile system becomes more and more predictable as it becomes more and more fragile. You still can’t predict exactly what confluence of events will cause the system to break down, or when, but you can be increasingly sure that it will happen and that the timeframe during which it will happen has narrowed. This applies in many areas including the economy, the energy market, bushfires, water supply and floods, among many others.
Thanks for this post. In the US, Treasury yields have inverted. Not a good sign.
Recession signals are flashing again in the bond market as closely watched Treasury yields invert for the first time since April
https://markets.businessinsider.com/news/bonds/inverted-yield-curve-recession-signal-inflation-fed-policy-economy-2022-6
Thank you, Nick.
I wrote my masters on central bank independence in 1994 – 5, including a period of study in Germany, and have followed the innovation / fashion since and, post 2008 when the remit, especially regulatory, of central banks expanded, have considered updating the masters into a doctorate.
Without considering the responses to 2008, Brexit, the pandemic and the war in Ukraine, I reckon this was always going to happen. The capture of central banks and, at first, monetary policy and, then, regulatory policy by certain interests, often using media and think tank proxies to drive a one sided debate, meant that the interests of ordinary people, “mom and pop” businesses etc. were always going to be relegated, at best, to an after thought.
The composition of the Bank of England’s monetary and financial policy committees, vide Rishi Sunak’s former boss Richard Sharp (now at the BBC and Royal Opera), and sourcing of advisers, like Cameron groupie Huw van Steenis, has never been examined and challenged.
The sister of the wife of Mark Carney is married to a Tory hereditary peer, heir to Jardine Matheson and cousin of David Cameron. They meet every year at the Cornbury estate in Oxfordshire. This part explains why and how the colonial matinee idol was imported. Haldane should have got that job.
When the Bank of France was given independence, in advance of monetary union and to cement the disastrous “franc fort” policy (and protect the policy and government from challenge), and ECB was set up, lip service was, at least, paid to diversity of thought by having monetary policy committee members from labour movement* backgrounds, including Wim Duisenberg. The British left did not and still does not see the need to engage, even when their insider sympathisers offer to assist (which part explains Tory hegemony).
*Gordon Brown put former trade union baron Bill Morris on the court of the Bank of England and got him fast tracked to membership of the Marylebone Cricket Club to buy off the labour movement and pretend independence for the Bank of England, an idea that Larry Summers’ groupies Ed Balls and Yvette Cooper (aka Mrs Ed Balls) and PIMCO’s Andrew Balls put to Brown, was progressive.
One hopes former Bank of England official Harry chimes in.
One also hopes former British officials Anonymous 2 and David pipe up with regard to wider issue of the capture of policymaking, relegation of career civil servants / experts and increasing reliance on outside consultants, media and think tank shysters etc.
I always wondered how “the colonial matinee idol was imported” to the UK bank. It is always who you know, not what you know!
Regarding our most notorious technocratic export, Colonel, you can always …
https://www.youtube.com/watch?v=bOR38552MJA
What does it mean? “Sovereign debt will be monetized to whatever extent it needs to be, or it’ll collapse.”
No expert, me, when it comes to this topic, but I take it to mean that since nation states or other entities create their currencies ex nihilo, and that the currency’s value depends upon public recognition and acceptance of same, that these monetary sovereigns must be willing to create as much money as needs be to pay their obligations or their currency’s value will collapse for lack of public faith in it. Or something like that…..maybe.
I’m no expert either, but it seems that the issue of taxes is often missing from these discussions. Yet it has been argued poignantly that taxes drive demand, and the “value” is in the utility…and there seems no clear distinction between the monetary and the fiscal in a context of issuer v. users, from my POV.
With interest rates low, everyone and his brother has been issuing debt. Debt has exploded (which can be looked at as claims for dollars) – it has grown far greater than the economies ability to generate dollars. When debt exceeds the amount of dollars in existence, the central bank increases the money supply.
When growth is sluggish, the CB reduces rates to stimulate credit growth. When the economy is booming, they increase rates to discourage credit growth. What most people don’t get is that the Fed (CB) is far more interested in the credit markets than the stock market. (or should be!)
So allowing everyone to issue debt has the effect of forcing the creation of more money?
If the ECB stops buying Italian govt. bonds then the Italian govt. will collapse due to lack of money.
Thank you. Makes perfect sense in those terms. Countries that use the Euro have governments that need to somehow get their hands on them before they can spend them. Unlike the USA or UK where the government can more simply spend money into existence.
If decades of fiddling with interest rates, printing money and doing both badly was ever seen to constitute “God-like Omnipotence”, then there is the problem laid bare on a slab!
There is a reference to Lyn Alden in the article. She is a very astute commentator on economics and financial markets and has a number of video interviews available on YouTube. I would particularly recommend the one with Adam Taggart from Wealthion.
Also, the USA promoted that “core inflation rate is the price change of goods and services minus food and energy. Food and energy products are too volatile to be included.”
This was a triumph of public relations as averaging/smoothing food and energy prices into the inflation number was not proposed, these components were simply excluded..
It is not as if consumers are allowed to ignore food and energy prices if they want to eat, drive or keep warm.
I remember when Alan Greenspan was viewed as a “national treasure” by Daniel Patrick Moynihan
https://www.nytimes.com/1996/06/21/business/senate-confirms-greenspan-91-7-for-a-third-fed-term.html
This “national treasure” then embarked on a path of financial de-regulation and bubble promotion.
I think the phrase “God-like Omnipotence” might have originated in the Milton Friedman-esque, neoliberal, fevered minds declaring for decades the “Market is the greatest information processor in the world” and the Market ought to be the guidance for all human activity and it’s govt’s roll to get out of the way of the Market. (you think I’m kidding.) It’s a short step from believing that destructive, reified, ‘the Market’ myth to mentally investing Central Bankers — govts’ money men to and protectors of the Market — with God-like-Omnipotence.
There, as you say, is “the problem laid bare on a slab”!
John Kenneth Galbraith
Do us mopes have any voice at all, at all, in laying down what the political economy, and the negative feedback mechanisms that might have a prayer of “metastabilizing” it, should look like? Or are we just little cogs in a machine that empowers the looters to ever higher flights of lootery? Maybe ending with the Authorization for the Use of Military Force delegating the war powers yet again to the cretins running “policy” and a confrontation with Russia/China that will provide some massive opportunities to do reconstruction on the ashes and rubble?
Central banks’ only tools are interest rate levering, jawboning, and moving created money/wealth into the pockets of the already filthy rich — is that about how it works, in gross?
Any possibility that this situation could end up other than very very badly, for the 90%?
As I’ve written before, economists and their brethren the central bankers still cannot agree on the cause(s) of the Great Depression. The GD was perhaps the most significant economic event in modern human history, it happened a hundred years ago, all the data are in, and all the consequences of central bank actions are on the record. And yet, 𝘵𝘩𝘦𝘺 𝘴𝘵𝘪𝘭𝘭 𝘤𝘢𝘯𝘯𝘰𝘵 𝘢𝘳𝘳𝘪𝘷𝘦 𝘢𝘵 𝘢𝘯𝘺 𝘴𝘰𝘳𝘵 𝘰𝘧 𝘤𝘰𝘯𝘴𝘦𝘯𝘴𝘶𝘴. What does that say about the practice of macro-economics?
Given the infinite complexities of a large economy, no person or group can possibly have “God-like omniscience”, which is why the predictions of economists are often so woefully wrong. Their forecasts are often based on incomplete or outdated data and therefore central bank actions will often have unpredictable consequences.
The larger problem with central bankers in today’s economies is that they do indeed have almost “God-like omnipotence”, granted to them by governments. But without 𝘰𝘮𝘯𝘪𝘴𝘤𝘪𝘦𝘯𝘤𝘦, which of course is impossible, their omnipotence cannot enable them to control or “fine-tune” the economy. It can only allow them to distort it, either deliberately in order to favor certain sectors, or unintentionally out of ignorance of their ignorance.
The time has come to question the very existence of central banks.
Thank you, MM.
In 2009, the then director for financial stability at the Bank of England, Andy Haldane, complained about the lack of history taught in economics, something he sought to put right, but with little buy in from interested parties.
Teaching history is a dangerous thing because it allows the peasants to understand the world they live in. God forbid that should happen. /s
Millie’s mention of the causes of the Great Depression causes me to fetch up the name Amity Shlaes, she of New Deal Denialism. Don’t know what happened to her; probably burrowed in a think tank somewhere.
Perhaps they are susceptible to grandiose fantasies, but life without central banks was the post-Civil-War period we now call the “Gilded Age.” The populist movement (Farmers Alliance, People’s Party) in the U.S. began lobbying for a central bank, and Wilson finally conceded (wisely keeping the power, if not the ownership, in government hands).
The biggest problem, IMHO, is that since Milton Friedman came along, government officials believe central banks will relieve them of the necessity of governing, and particularly of a wise fiscal policy–which is really what’s needed here. A New New Deal, if you will, is the answer, not more fiddling with money supply numbers and interest rates.
Seems relevant somehow:
“Can omniscient God, who
Knows the future, find
The Omnipotence to
Change His future mind?”
–Karen Owens
It still amazes me that there is discussion amongst “very serious people” of how moving around a tiny number that applies to a very select group of people (the Fed Funds rate) can influence another number (inflation) that is gamed to hell and back so as not to include costs that have actually gone up quite a bit over time (healthcare, education, asset prices), and then that number somehow makes the economy great or not despite any other consequences. It’s truly mind-boggling.
Also, that these people who advocate for free markets and no regulation think there is an elusive magic number (Natural Rate of Interest) that moves around so you never know quite where it is. And the Fed’s job is to hunt for the magic number and try to guess at it the best they can. And if they miss by too much there is six more weeks of winter (oops wrong prognosticator) and then either a recession or runaway inflation (or both).
better you go back to the middle ages and count angels on the head of pins.
or return to classical Greece and find an augurist.
In Shanghai (and to a lesser extent Beijing)? I understand the former is a major port city but it’s hard to imagine a 3 month lockdown of a couple of big cities would contribute hugely to the worldwide inflation we’re seeing now, especially when shipping traffic in and out of Shanghai by no means ceased completely during their elimination campaign (other Chinese cities, such as Jilin which was hit by Omicron around the same time as Shanghai, locked down timeously and therefore only briefly). Certainly, to my mind at least, it seems fairer to imagine that the hit of the pandemic with respect to inflation is more likely to be the workforce constantly being weakened due to the fact that all semblance of disease control has been abandoned in most of the world and so workers are getting sick, repeatedly (hence the push that I think we are starting to see to have isolation periods scrapped completely); and, a significant portion of the workforce is withdrawing because SARS2 is making them seriously ill beyond the mere acute phase of infection and therefore unable to work. That’s bound to contribute to stagflation conditions, surely.
We’ve put our trust in the wrong accounting system. If the ups and downs of money in an economic system are enough to paralyze or shatter the system, then something new is needed. Because money is only the tool. Does a carpenter freak out when he spills all his nails? Instead of a central banking system which is based on timely clearance of all debts and obligations – or debt service – we need a central insurance system which is based on guarantees of steady flows and transactions whose spikes and dives are smoothed out automatically. We can create this institution to be “independent” of corruption fairly easily because it is the Central Insurer who will have to pay out if things go haywire. (That is independent but not “private” – but let’s be sure to write good insurance fraud laws to have a clawback.) Pay out into the system, like QE, to keep things running smoothly. So that the payments are balanced automatically and are part of the greater watershed of exchange and commerce. Sort of Mutual Finance. We need financial actuarial tables to guide us here – all those spikes and dives used to establish long term probability and “trend” which can be addressed with a steadier hand than freaked-out central bankers doing QE and/or raising or lowering interest rates like squirrels on a wheel. Inflation and Recession panic is totally unnecessary. The basic monetary value of everyone can be established at birth. Maybe.
And I was also thinking about digital banking in conjunction with some new system like this. Because banking, as we know it, has been a gradually developing infrastructure to maintain proper fiscal conditions like full employment and adequate money supply for the economy. The infrastructure is naturally cumbersome and complex. But now we are on the verge of not just electronic banking, but digital currencies. Digital currencies will change the new infrastructure. And will be much easier to adapt to new systems of accounting. I would think. Almost something as clever as coding the end result, the best conditions, and letting the computer herd all the cats in that direction. Without causing overstimulation, graft, fraud (hopefully), recession or poverty.
I urge anybody who is truly seeking understanding of the global dollar economy to consider making a serious study of the work of Jeff Snider, who has a loooong record of been heaping scorn on central bankers and their alleged monetary policy in voluminous and highly idieosyncratic screeds that do require some significant effort to reduce to practical knowledge. Daily at alhambra and weekly at realclearmarkets, he’s on the case of central bankers and their bungling. Grok Snider, and it becomes hard to take central bankers with any seriousness other than as facilitators for looting by their banker cronies.
Snider’s central thesis, as I understand it, is that the Eurodollar is truly the global reserve currency, and the Eurodollar is pure ledger money created and maintained by global banks and their clients operating in offshore locations so as to be unfettered by domestic regulation. Using this thesis, all sorts of recent economic history comes into sharp focus; I won’t burrow into details here but suffice it to say the GFC of 2008 should be seen as the failure of the Eurodollar system, which had delivered decades of global growth via increasing money supply, as the market participants discovered failure modes related to dodgy collateral and resorted to limiting and defending their balance sheets at the expense of global money creation.
Snider is especially fascinating to me as a student of MMT. The Eurodollar is a fiat currency par excellence, and everything MMT teaches about fiat currency applies to the Eurodollar. What distinguishes it from the traditional currencies normally associated with a sovereign is that it’s completely private and relatively decentralized. Although it denominates primarily in USD, it’s independent and largely outside the control (if not the influence) of the US Treasury and the Fed. The influence comes in surprising indirections, such as via the overall quantity of Treasury bill issuance, which forms the most desirable collateral for Eurodollar lending and derivative settlement. What leaps out to me as an MMT student is the Eurodollar as a magnificent demonstration of banks as unelected sovereigns. The Eurodollar system has been the engine of globalization for decades, but ever since 2008 that engine has been sputtering and stalling.
That’s a well-done summary on Snider. His Eurodollar University aside, the point you touched on being largely outside the control (if not the influence) of the US Treasury and the Fed cannot be overstated. This is huge and as he often queries, future demand for dollars outside of the US will also be huge because no one really knows the extent the liabilities these Eurodollars entail.
Good stuff- thanks for the suggestion!
We live in interesting times. The planet’s natural processes are collapsing, the atmosphere is heating up, flora and fauna are dying off at increasing rates. We know with a great deal of certainty that human activities are the origins of these consequences. And yet, most people still talk about things such as recessions, GDP growth, consumer spending, corporate profits, interest rates, and so on. This is absurd. Let’s have a recession; one long lasting and sharp. Let’s stop consuming. Let’s stop producing. Let’s all become “poor”. We can’t have a liveable planet AND continuing economic growth. The real challenge facing global societies is how best to allocate diminishing resources in the most equitable way. Instead, we keep looking for ways to jigger things so as to somehow increase resources even as we are busy destroying the planet due to our profligate ways. That is a global sickness!
Nobody who is not poor, or never has been poor, can visualize being poor, even if that would prevent climate change and all the other environmental changes that are coming our way.
Most people are susceptible to “Midas Disease”–mistaking the symbols of wealth (dollars, euros, etc.) for actual wealth (what those currencies can buy). Alfred North Whitehead called this the fallacy of misplaced concreteness–for example going to a restaurant and devouring the paper menu rather than the food itself. It’s far more widespread than COVID.
I’d suggest it has a longer history too. The Midas myth supposedly came from the same period when monetary tokens as we now understand them originated. The Hebrew Bible (Old Testament) even forbids worshipping symbols (idols) rather than the genuine article.
Unfortunately, this is a tendency in humanity generally.
Agreed. Essentially we have lost the distinction between “better” and “more”. What is needed is to curb and reduce human populations and at the same time rejig both our economic systems and individual expectations to get off this addiction to endless growth. Increasing war, famine, disease and climate change will result from business as usual.
When one is are already “poor” the next step after “recession” can bring hunger and death. See: Afghanistsan, Somalia, etc. So, “let’s all become poor” only works for the wealthier folks on the planet. Without doubt, radical conservation should be the goal— but some need to do more to conserve than others.
Little central banks can do when the cause is supply side, as central banks barely has any control over the demand side (most money comes from private bank lending and credit card usage, with no “multiplier” or reserves to hold them back).
The basic blame there is companies going all in on just-in-time fragility in order to goose profits, and thus stock valuations, over supply line resilience.
What is funny is that the iceberg is beginning to turn, as i recently read some consumer tech brands are worried they can’t shift their now recovering product stock as the inflation is making them too expensive.
Amen, digi_owl. The bizarre state of economics currently is that it promotes the belief that raising interest rates will somehow cure COVID, unjam the ports and make peace with Russia/Ukraine. I’ve said it before, but it bears repeating. This is the modern equivalent of 19th century medicine which believed bleeding patients would heal them.
Well, they are leeches…
Something like around $5 Trillion was conjured out of thin air during hair furor’s reign, which in normal circumstances of only foldable fiat money being around would cause massive hyperinflation, but nobody saw nothing really, and we’re feeling the opening innings of runaway inflation, but not hyperinflation, somewhere in the middle between stagflation and there.
Sorry, issuing currency does *not* cause inflation. If it did there would be rampant inflation in 2007-8 when the Fed (according to its own audit) issued $16 – $29 trillion in credit to the same financial sector whose frauds crashed the economy.
And this makes some sense. If people save (not spend) the money, then more money does not bid for the same goods & services.
Our current inflation stems from the COVID shortages, the jammed ports, and the U.S. shooting itself in the food with Russian / Chinese sanctions. Talking about money being at the root of inflation is parroting the despicable Milton Friedman, a man whose economics has been right less often than a stopped clock.
I think that central banks have been juicing the statistics to create an illusion of success (hedonic adjustments anyone) for years.
Reality has finally hit.
“This is not the first time the Telegraph has shone a light of the BoE’s recent failings.”
This would be the same Telegraph that the Barclays bought as a fanclub for Borisconi and a relentless supporter of Brexit, would it?
The same one that lost 27% of its’ readership in one year as a result? The Telegraph whose relentless boostering of Brexit has got us where we are now?
But the BofE’s to blame, is it?
You’re correlating the Bank of England with a newspaper?
Learning the history of money and debt from Micheal Hudson and David Graeber has been very enlightening. It’s not like in the whole history of humanity this has not occurred before, it’s occurred many times, and as Prof. Hudson says,
Debts that can’t be paid, won’t be
https://michael-hudson.com/2012/04/debts-that-cant-be-paid-wont-be/
But always remember that when you hear an elite screaming that that “they want their debts to just disappear” (as in student loans or whatever), it’s because the elites have been doing just that FOR YEARS. Central banks have been bailing out broken banks and failed corporations for years. It became normal business after 2008. And nobody ever goes to jail or even loses their role as CEO.
“no, wait! This is what we’ll do! we’ll buy your worthless bonds at face value! Problem solved!
OMG we are so effing SMART!”
I believe that the “original sin” where central bank “independence” is concerned was the conceit that elected representatives could abdicate their responsibility for the economy properly governed through fiscal policy by assuring the public that the economy should rather be governed by monetary policy, and that monetary policy ought to be set by “the experts” selected from the technocratic priesthood that is orthodox economics.
As they sowed, so we are reaping …