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Central banks are more divided than ever

Fed Chairman Jerome Powell at the 2022 Jackson Hole economic symposium in Wyoming. Credit: Getty

August 25, 2023 - 7:00am

Until recently, with the world breaking into rival blocs, Western central bankers appeared to offer a rare global harmony. Their policies drew from the common wellspring of orthodox macroeconomic theory, and they were largely fighting the same battles: first recovering from the 2008 financial crisis, then staving off the collapse of the world economy in the early days of Covid-19, and finally choking off the inflation surge that came later in the pandemic. 

But as we enter the post-pandemic world, that common front is starting to fray. So today’s speeches at the Jackson Hole summit in Wyoming, in particular those by Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde, will be closely watched for clues as to the current thinking of central bankers, and whether they can still find agreement on the way forward. 

For starters, central bankers now confront differing problems. The US Federal Reserve faces a stronger economic rebound than it expected, raising fears of resurgent inflation. The ECB, in contrast, faces implosion and possible deflation in its biggest economy, Germany. Meanwhile the Bank of England wrestles with the spectre of a return to stagflation in Britain, one that raises the possibility of both recession and inflation, making policy choices more challenging. 

It’s appearing less likely than ever that one policy can fit all systems. Meanwhile, with central banks coming under pressure from politicians for getting things so wrong, we may be retreating from the era of central-bank autonomy back towards the pre-1980s model, when governments provided more direction.

Compounding the differences is that the standard models relied upon by central banks have not worked out quite as they anticipated. They drew on the standard toolbox to conclude that the recent surge in inflation would be transitory. Now that they’ve been proved wrong, they can’t agree why. 

Economists in the so-called “team transitory” camp stand by the standard model, pointing to recent declines in inflation as proof that even though the transition lasted a bit longer than expected, their thesis was still correct. But many are the market analysts who counsel prudence, saying that inflation has now bottomed and will soon rise again.

Some, most prominently former US Treasury secretary Larry Summers, bang on that inflation will only come down when unemployment rises and real wages fall. What they fail to explain is how, amid the resilient job markets and rising real wages, inflation has begun to come down. The fact that the recent drops in inflation have coincided with declining profits and falling asset and property prices would seem to vindicate the exponents of profit-driven inflation, like German economist Isabella Weber, who in consequence are starting to receive a hearing at some central banks. The old guard, apparently keen to blame workers, isn’t too happy about that.

Meanwhile, the traditional tool of macroeconomic management used by central banks, interest rates, seems not to be operating as expected. Most economists had expected to see a sharp slowdown in the economy by now. This raises the possibility that the post-financial crisis quantitative easing experiment, during which central banks meddled directly in bond markets to get money into circulation, has changed the rules of the game in ways they don’t yet understand. That, in turn, raises the worrisome possibility of unknown unknowns, such as a central bank overshooting and causing a crash, or undershooting and locking in inflation. 

The Jackson Hole summit will provide important clues as to what happens next. However, it may be that we’re entering a new period, when a more varied policy environment ends the veneer of unity previously provided by “economic science”. Because as they improvise their way towards apparently ad hoc solutions, central bankers are finding there’s a good deal more art to economics than they thought.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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Ian McKinney
Ian McKinney
10 months ago

We spent the best part of a decade pumping money into the economy via QE, then we closed the economy for the best part of a year, so people could accumulate capital and companies ran down inventory, and now we’re wondering where inflation is coming from?

Are these people for real??

Warren Trees
Warren Trees
10 months ago
Reply to  Ian McKinney

They are not. They are frauds. This line says it all:
“…and they were largely fighting the same battles: first recovering from the 2008 financial crisis, then staving off the collapse of the world economy in the early days of Covid-19, and finally choking off the inflation surge that came later in the pandemic.”
All manufactured by themselves.

Warren Trees
Warren Trees
10 months ago
Reply to  Ian McKinney

They are not. They are frauds. This line says it all:
“…and they were largely fighting the same battles: first recovering from the 2008 financial crisis, then staving off the collapse of the world economy in the early days of Covid-19, and finally choking off the inflation surge that came later in the pandemic.”
All manufactured by themselves.

Ian McKinney
Ian McKinney
10 months ago

We spent the best part of a decade pumping money into the economy via QE, then we closed the economy for the best part of a year, so people could accumulate capital and companies ran down inventory, and now we’re wondering where inflation is coming from?

Are these people for real??

Andrew Buckley
Andrew Buckley
10 months ago

The Central Banks the world over seem to have spent the past 15 years managing things for the benefit of only a few people, those already comfortably off to wealthy, the big global players and those sitting on assets.
And then people get in the way and do not behave as they are supposed to! Humanity is not a machine and does not follow the simplistic macro economic viewpoint.

Andrew Buckley
Andrew Buckley
10 months ago

The Central Banks the world over seem to have spent the past 15 years managing things for the benefit of only a few people, those already comfortably off to wealthy, the big global players and those sitting on assets.
And then people get in the way and do not behave as they are supposed to! Humanity is not a machine and does not follow the simplistic macro economic viewpoint.

Mark Goodhand
Mark Goodhand
10 months ago

It took a while, but towards the end we see a hint at the truth:

“This raises the possibility that the post-financial crisis quantitative easing experiment, during which central banks meddled directly in bond markets to get money into circulation, has changed the rules of the game in ways they don’t yet understand”

Inflation is the increase of the money supply. When the money supply increases faster than the supply of goods and services, prices rise. It really is as simple as that.

Mark Goodhand
Mark Goodhand
10 months ago

It took a while, but towards the end we see a hint at the truth:

“This raises the possibility that the post-financial crisis quantitative easing experiment, during which central banks meddled directly in bond markets to get money into circulation, has changed the rules of the game in ways they don’t yet understand”

Inflation is the increase of the money supply. When the money supply increases faster than the supply of goods and services, prices rise. It really is as simple as that.

Marcus Leach
Marcus Leach
10 months ago

It is quite startling that it should be suggested that the policies of central banks in recent times: “drew from the common wellspring of orthodox macroeconomic theory”.
Central banks have been engaging in a reckless experiment with ultra loose monetary policy, informed by patent idiocy such as Modern Monetary Theory, that has ended up where anyone with a brain and basic understanding of actual orthodox economics knew it would.
Facilitating massive piles of government, business and consumer debt, and enormous, unsustainable asset price bubbles, all dependent on historically exceptional low interest rates and QE, created an economic nuclear bomb under the world economy, just waiting for the inevitable black swan to prime it.
The grossly negligent, reckless central bankers are staring at the wreckage of their experiment, and simply don’t know how to deal with the contorted mess they created. They don’t know because their policies were not, as the author suggests, orthodox, and as such they have created a set of unprecedented global circumstances which they have no idea how to unwind. Having to be seen to be doing something, they just mindlessly smash at the problems with the hammer of rising interest rates, and in doing so a perilously close to setting off the debt and asset bubble bomb, that will blow up the world economy.
If inflation sufficiently abates and interest rates start to fall as a consequence, there will be a hiatus of low growth and stagnation. Without ultra loose monetary policy to support them however, the debt and assets bubbles will eventually pop.
If inflation doesn’t abate and even starts to worsen, it will be a question of whether the central banks will let the bomb go off, or give up on the fight with inflation and turn the monetary taps back on for another desperate economic pump. Based on historical experience of the cowardly self-preservation instincts of central bankers and politicians, I think the later is far more likely
The bomb goes off, or the cheap money taps are turned back on and inflation allowed to let rip. Either way its global economic collapse. It’s just a question of whether it’s sooner or later.

Last edited 10 months ago by Marcus Leach
Nik Jewell
Nik Jewell
10 months ago
Reply to  Marcus Leach

Good comment. I think Covid gave them the excuse to kick the can down the road a bit longer, and print a load more money to keep it all afloat. The collapse is coming.
What comes afterwards? Devaluation, CBDCs and UBIs? The commercial banks must be getting nervous because they are going to lose badly in that scenario.

Nik Jewell
Nik Jewell
10 months ago
Reply to  Marcus Leach

Good comment. I think Covid gave them the excuse to kick the can down the road a bit longer, and print a load more money to keep it all afloat. The collapse is coming.
What comes afterwards? Devaluation, CBDCs and UBIs? The commercial banks must be getting nervous because they are going to lose badly in that scenario.

Marcus Leach
Marcus Leach
10 months ago

It is quite startling that it should be suggested that the policies of central banks in recent times: “drew from the common wellspring of orthodox macroeconomic theory”.
Central banks have been engaging in a reckless experiment with ultra loose monetary policy, informed by patent idiocy such as Modern Monetary Theory, that has ended up where anyone with a brain and basic understanding of actual orthodox economics knew it would.
Facilitating massive piles of government, business and consumer debt, and enormous, unsustainable asset price bubbles, all dependent on historically exceptional low interest rates and QE, created an economic nuclear bomb under the world economy, just waiting for the inevitable black swan to prime it.
The grossly negligent, reckless central bankers are staring at the wreckage of their experiment, and simply don’t know how to deal with the contorted mess they created. They don’t know because their policies were not, as the author suggests, orthodox, and as such they have created a set of unprecedented global circumstances which they have no idea how to unwind. Having to be seen to be doing something, they just mindlessly smash at the problems with the hammer of rising interest rates, and in doing so a perilously close to setting off the debt and asset bubble bomb, that will blow up the world economy.
If inflation sufficiently abates and interest rates start to fall as a consequence, there will be a hiatus of low growth and stagnation. Without ultra loose monetary policy to support them however, the debt and assets bubbles will eventually pop.
If inflation doesn’t abate and even starts to worsen, it will be a question of whether the central banks will let the bomb go off, or give up on the fight with inflation and turn the monetary taps back on for another desperate economic pump. Based on historical experience of the cowardly self-preservation instincts of central bankers and politicians, I think the later is far more likely
The bomb goes off, or the cheap money taps are turned back on and inflation allowed to let rip. Either way its global economic collapse. It’s just a question of whether it’s sooner or later.

Last edited 10 months ago by Marcus Leach
Billy Bob
Billy Bob
10 months ago

Workers wages haven’t kept pace with inflation, while company profits have risen faster than the rate of inflation, therefore it seems fairly obvious to me which is the bigger driver. Also increasing interest rates is supposed to cut spending (and thus lower inflation) by increasing mortgage costs and leaving people with less disposable income. It obviously isn’t going to be as effective when you’ve spent a generation pricing youngsters out of owning a family home and now have record low levels of homeownership.

Billy Bob
Billy Bob
10 months ago

Workers wages haven’t kept pace with inflation, while company profits have risen faster than the rate of inflation, therefore it seems fairly obvious to me which is the bigger driver. Also increasing interest rates is supposed to cut spending (and thus lower inflation) by increasing mortgage costs and leaving people with less disposable income. It obviously isn’t going to be as effective when you’ve spent a generation pricing youngsters out of owning a family home and now have record low levels of homeownership.

Nik Jewell
Nik Jewell
10 months ago

No mention of China teetering on the brink, CBDCs or possible currency devaluations in this piece?

Nik Jewell
Nik Jewell
10 months ago

No mention of China teetering on the brink, CBDCs or possible currency devaluations in this piece?

Steve White
Steve White
10 months ago

Yes, other economic models besides one of hyper-financialization that favors globalist corporatism, the investor class (hedge fund  billionaires that wield such policy power) and this insane totally open free trade that has hollowed out the industrial sectors of Western nations making places like China (who subsidizes their industry in order to put Western industry out of business) the worlds workshop. In fact, someone should be held accountable for what has happened to our countries, our cultures and our people. It’s not going so well for us working class types in the West, and cheap plastic junk from China isn’t putting food on our tables. 
Keynesianism is this favored economic model which really only seems to care about the moving of money, the spending of money, which destroys personal wealth. To spend destroys personal wealth, to save increases it. That’s classical economics. Yet the model today is to borrow, to go into debt.

Last edited 10 months ago by Steve White
Steve White
Steve White
10 months ago

Yes, other economic models besides one of hyper-financialization that favors globalist corporatism, the investor class (hedge fund  billionaires that wield such policy power) and this insane totally open free trade that has hollowed out the industrial sectors of Western nations making places like China (who subsidizes their industry in order to put Western industry out of business) the worlds workshop. In fact, someone should be held accountable for what has happened to our countries, our cultures and our people. It’s not going so well for us working class types in the West, and cheap plastic junk from China isn’t putting food on our tables. 
Keynesianism is this favored economic model which really only seems to care about the moving of money, the spending of money, which destroys personal wealth. To spend destroys personal wealth, to save increases it. That’s classical economics. Yet the model today is to borrow, to go into debt.

Last edited 10 months ago by Steve White
Steve Jolly
Steve Jolly
10 months ago

“It’s appearing less likely than ever that one policy can fit all systems. Meanwhile, with central banks coming under pressure from politicians for getting things so wrong, we may be retreating from the era of central-bank autonomy back towards the pre-1980s model, when governments provided more direction.”

What? Different countries of different sizes in different places with different resources don’t all need the same approach at the same time? You mean the global financial system produces winners and losers and that something that’s good for China can be bad for everybody else? You mean people might expect their democratic governments to do something about companies exploiting cheap foreign labor working in horrible conditions as an alternative to paying a reasonable wage in a safe environment to domestic workers? You’re saying that countries should exercise sovereignty over their financial systems to protect their citizens from the vagaries of the global economy and the nationalistic policies of bad actors? No s*** Sherlock. As far as I’m concerned the pre-1980’s model is where we should be heading, as that’s about the point where most of the economic trends we’re complaining about started. The sooner we get there, the sooner we can consign this one world one policy globalist nonsense into the dustbin of history where it belongs. Power corrupts, and in more than one way. There is no system in which a group of unelected, unaccountable bureaucrats will operate for long with the public’s interests in mind. At some point, they’ll either decide they know what’s good for people better than the people themselves, and/or they’ll substitute their own interests for that of their countrymen and use the system to enrich themselves and their social peers. This is human behavior 101. It shouldn’t surprise anybody this isn’t working.

Last edited 10 months ago by Steve Jolly
Steve Jolly
Steve Jolly
10 months ago

“It’s appearing less likely than ever that one policy can fit all systems. Meanwhile, with central banks coming under pressure from politicians for getting things so wrong, we may be retreating from the era of central-bank autonomy back towards the pre-1980s model, when governments provided more direction.”

What? Different countries of different sizes in different places with different resources don’t all need the same approach at the same time? You mean the global financial system produces winners and losers and that something that’s good for China can be bad for everybody else? You mean people might expect their democratic governments to do something about companies exploiting cheap foreign labor working in horrible conditions as an alternative to paying a reasonable wage in a safe environment to domestic workers? You’re saying that countries should exercise sovereignty over their financial systems to protect their citizens from the vagaries of the global economy and the nationalistic policies of bad actors? No s*** Sherlock. As far as I’m concerned the pre-1980’s model is where we should be heading, as that’s about the point where most of the economic trends we’re complaining about started. The sooner we get there, the sooner we can consign this one world one policy globalist nonsense into the dustbin of history where it belongs. Power corrupts, and in more than one way. There is no system in which a group of unelected, unaccountable bureaucrats will operate for long with the public’s interests in mind. At some point, they’ll either decide they know what’s good for people better than the people themselves, and/or they’ll substitute their own interests for that of their countrymen and use the system to enrich themselves and their social peers. This is human behavior 101. It shouldn’t surprise anybody this isn’t working.

Last edited 10 months ago by Steve Jolly
Justin Clark
Justin Clark
10 months ago

The book Creature of Jekyll Island was a disturbing read but explains EVERYTHING in respect of Central Banks…. These people are frauds for sure. Manipulators and Parasites.