Who’d want to be a central banker?
I was in my late teens and growing up in Lucerne, a small town in central Switzerland, when the lady who owned a café which I frequented gave me a book which was the German translation of William Morris’s utopian novel News From Nowhere. I had never heard of William Morris but fortunately the book also included a preamble which introduced the author as one of Britain’s leading Arts and Crafts designers and, by dint of circumstances, I would a not many years later have in my London flat a sofa and chairs covered in fabric of his design. “News From Nowhere” is a utopian novel in the Fabian understanding of socialism rather than in the later dominant Marxian one.
One of the key features of Morris’s utopian world is that the society his central character finds is formed around the unquestioned altruism of all the people he meets. Liberty and equality, usually and especially in the context of “Liberté, Egalité et Fraternité” deemed to be mutually exclusive, happily coexist is a happy world of anarcho-syndicalism. Morris’ utopia is free of any form of egotism or materialism. Equality is bottom up and not, as Marx would model in his Dictatorship of the Proletariat, top down.
Post-Fourth International socialist doctrine was in essence based on the writings of Karl Marx and it could be argued that, since the last decades of the nineteenth century, more or less all forms of public policy objectives have been shaped by the axiomatic assumption that social justice can be imposed. Thus it is entirely understandable that in the Western body politic the actual rather than the doctrinal differences between right and left are, if the stones are lifted, marginal.
A few months ago some senior investor – it might well have been Warren Buffett or maybe Charlie Munger – was asked what they’d do, were they, instead of Jay Powell, Chairman of the Federal Reserve System. The reply caused much mirth around markets as it was simply “I’d resign”. If my memory serves me, it was around the time when it was becoming painfully obvious that inflation was not, as the Fed has so confidently assured us, transitory.
Central banks have had a pretty rough time of late. But they have also taken an inordinate amount of abuse, a fair quantum of which is without doubt of their own making. I say a fair quantum but surely not all of it. Every time the world “recession” is uttered, it appears to come with the rider that it is the central banks and their tight monetary policy which will have been the cause. That is to be contested. If anything in terms of monetary policy were to be blamed, it would have to be a decade and a half of historically low interest rates which first set the scene for the Global Financial Crisis and which were then perpetuated in order to bring us out of it again.
The UK’s Office for Budget Responsibility recently released a paper in which it forecast that at the current rate of government borrowing, by 2070 the debt/GDP ratio will have risen to 300% from the current 106%. Just for good measure, it added that, in the same time, the ratio of pensioners to workers would decline from the current one in four to one in three. It threw in another few numbers we might prefer not to see but the upshot was that the tax burden on the working population will have to rise significantly in order to just fund the debt pile, let alone maintain basic cradle to grave services of health, education and defence. MMT or Modern Monetary Theory basically assumes that debt can be raised interminably and that the interest can all the while be capitalised. So where’s the problem?
After a decade and a half of ultra-loose monetary policy with on the one hand artificially low interest rates and on the other massive injections of cash into the economy by way of quantitative easing, central banks had helped to set amongst the both businesses and households high levels of expectations in terms of what the role of the monetary authorities really is. The political class seems to have become equally entitled in its assumptions that in the end the central bank will always span the safety net. Unrealistic as it was to expect the taps of monetary policy to remain open and the carousel to continue to turn even before Covid and before underlying geopolitical tensions had risen to the surface, since both have come to confront us, the impossibility of sailing on as before has become a stark reality.
As much as Europe is struggling and enviously glancing at the US economy, it should not go unnoticed that said recovery is driven by the minor matter of US$ 3 trillion of debt funded investment in the country’s creaking infrastructure. But Joe Biden’s so-called New Deal is being implemented when the national debt is at over 120% of GDP as opposed to FDR’s which began in 1933 and ended in 1939 during which time the debt increased from 33% to 43% of GDP. Is it right to be sniffy about the UK’s and the EU’s significantly flatter recovery trajectory or is there more to the story?
As our central bankers, especially those at the Old Lady of Threadneedle Street, sit there looking at stubborn inflation accompanied by a near-endless stream of public service strikes, they might rightly ask themselves whether they have not done their part in preventing their respective countries from falling off a cliff and that it might be time for the people themselves to shoulder part of the burden. As one commentator recently observed, the deeper the authorities’ pockets were during the pandemic, the stickier inflation appears to be now. We had often enough been warned that the cash splashed through many pandemic support programmes would one day have to be repaid. Everyone nodded vigorously and then looked the other way. My own observations that in terms of monetary policy the new normal might be new but not at all normal was laughed at and I was tagged as a doom merchant. I still am. All I can add is “Momento mori”.
Never have more people discovered that they unable to work. Participation rates are falling. Never have more days been lost through sickness. Questioning absence due to mental health issues is tantamount to harassment. And every emerging challenge to the economy or to the expected standard of living is first met with a call for either lower interest rates or new subsidies. Or both.
There is no doubt that monetary authorities across the West in late 2021 misread the signs of incipit inflation but then again, they could barely have been expected to have anticipated the seismic impact of the Ukraine war. We await the global response to the Russian cancellation of the Black Sea agreements and the putative effects on food price inflation. But has anybody asked whether, had Ukraine not been invaded or had it, as many of us would have expected, fallen at the first time of asking, inflation might not indeed have been transitory?
Most of us will have encountered “mushroom management” which is to keep them in the dark and from time to time to throw in a load of muck. But there is also “kangaroo management” which is predicated on the principle wanting to take great leaps, albeit with an empty pouch.
Whether Jay Powell at the Fed, Andrew Bailey at the Bank of England, Christine Lagarde at the ECB or Michele Bullock as new governor of the Reserve Bank of Australia, the job is thankless and the outcome uncertain. Criticism is cheap. Whether raising interest rates increases or suppresses inflation is being hotly debated but either way, the central bankers know that the solution ultimately lies not with them but with the people. As the Bank of England’s chief economist Huw Pill recently commented – albeit when he was in America rather than daring to at home – until people once again spit in their hands and productivity improves, all bets are off. Expecting the monetary authorities to interminably do the heavy lifting is so yesterday. Were I to be asked what I’d advise our monetary policy makers to do, I suspect that “Resign” would be close to the top of the list closely followed by the suggestion they try to find a way of transporting themselves to William Morris’s Utopia.
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