First-time readers will see, and regular readers will know, that I do not show much of the usual market deference for central banks or central bankers. But why should we?
Epistemologically, how can any bureaucrat have any true idea of what is happening in any one economy and national financial market, with all its moving parts, let alone when it is cojoined to the global?
Methodologically, how can they have any idea what effects their actions will or won’t engender when based on a theoretical neoliberal economic framework that would be laughed out of the room if presented as any form of hard ‘science’?
Heuristically, after their initial creation to finance wars (such as the Bank of England vs. Napoleon), central banks’ modern-day track record is one of almost continual policy failure – it’s just that we refuse to take the big picture view to frame it properly, instead focusing on the here-and-now pockets of coincidental historic ‘success’. A quick time-line recap of ‘amateur decades’ follows.
Pre-WW1 central banks are seen as having worked well under a gold standard. Actually it was British imperialism that tied things together. The global system ‘worked’, in a far simpler economy, by ripping off swathes of countries at gunpoint: and even then inflation swung massively positive and negative all the time. The gold peg was what mattered, not inflation. Then America got too big, and Germany got too big for its boots and tried to copy British imperialism. That was the end of the pre-WW1 period.
Post-WW1 central banks never all got back on a milquetoast gold standard due to huge war debts, or destroyed societies where they tried if they didn’t let credit boom anyway. All they rustled up was fascism, the Wall Street Crash, the Great Depression, and then Nazism and WW2.
Post-WW2 central banks under Bretton Woods and Cold War saw international capital flows regulated and credit rationed or allocated in a hypothecated manner domestically. As such, even their Keynesian models couldn’t screw things up too badly, and we got 25 years of low inflation and solid GDP growth. Yet the Triffin Paradox kicked in, and the US was forced off gold, and Bretton Woods collapsed. Then we saw deregulation of capital flows domestically and externally.
Central banks decided that following monetary aggregates was then the key to keeping inflation in check, because “inflation is always and everywhere a monetary phenomenon.” Except this policy didn’t work in the slightest, because once you deregulate markets, especially allowing US dollars to flow to the Eurodollar market, all your M0, M1, M2, M3 data are useless. Central banks had to abandon the policy framework.
Only with the emergence of true globalisation did inflation plunge and stay low - due to the breaking of unions, privatisation, and offshoring, especially to cheap-as-chips China. Again, this was nothing to do with central banks – who nonetheless took all the credit.
Such deregulation of course caused rolling financial instability, but the central bank response was always to cut rates into any crisis to blow more air back into the global bubble. Likewise, as society became more unequal and real wages lagged behind productivity growth, the response was to push up asset prices, not wages. Greenspan was the “maestro”. Then we got the GFC in 2008-09, which central banks’ didn’t see it coming at all despite being ‘experts’ in it.
Then it was the post-2009 ‘new normal’ decade, where central banks tried to get inflation back up to 2% by making rich people even richer with acronyms, and the ECB did “whatever it takes”, leading to yesterday’s door opening to structural, inefficient, mutualised monetisation of debt.
Then we rediscovered fiscal and monetary policy during Covid in 2020…and inflation came roaring back.
In short, central banks can look smart for a long time, but entirely due to exogenous developments. They can blow things up by being crazily ahead of the curve, or very much behind it. But most of the time they are just making it up as they go along.
Arguably the worst sin they can commit is to show they don’t know what they are doing and are making it up as they go along. Amateur hours are dangerous because, as with royalty, the risk is the mystique and magic wears off, and people start asking awkward questions. Or sharpening guillotines.
https://www.zerohedge.com/markets/rabobank-central-bank-amateur-hour-means-growing-risk-people-sharpening-guillotines