- Inflation = evil
- Central Bank and monetary policy -> keep always independent from government and fiscal policy
- External supply shock -> adjust demand (consume less)
In the impertinence of my youth, the fact that nobody had thought this out before didn’t strike as particularly strange: people were so dumb…
Twenty years have passed and, alas, it seems I am not immortal after all. I get wrinkles and joint pain like everyone else. Worst still, my way of thinking becomes relative, wavering, hesitating even. For here we are, back in a complicated situation and nobody seems to be able to take the brave measures those wise men of the textbooks prescribed.
Of course, everybody has read the books. But there’s a technical problem: we are dealing with live people and real interest here and they have a nasty habit of making their will count through elections, lobbying, markets, and worse. It seems that society is not figured out in a textbook so that best decisions can be taken on its behalf by a so-called neoclassic economist, but in fact made up of those annoying workers, bondholders, bankers and what not. They do have a voice and this is what they say:
When crisis hit, they don’t want to go bankrupt, jobless, idle or bust. They know they should, they have read the books, but they just don’t want it to happen to them.
So the government is forced to bail out, stimulate and subsidize, commensurately to each one’s capacity to put pressure on it. This costs money and debt is incurred into.
When this debt is too big, it makes interest go higher. This makes investment more expensive, debt more onerous, and it generally cools the economy down, which goes against the primary goal sought when incurring the debt in the first place. To put it this way, at a point the limit of fiscal policy is attained.
This is when all heads turn towards the Central Bank. After all, pretty much all around the world, a CB’s goals include “to maintain financial stability, a relatively stable level of prices and a level of activity close to full capacity” So, what you gonna do about this, Central Bank? If you don’t play ball, you are ruining the game for everyone…
And the Central Bank does oblige. It does so all over the world. Here we are, after all those textbooks have clearly explained how it’s done, and none the wiser. Western scholars used to have fun at the loose concept of independence that ruled the Bank of Japan’s policies. Who’s there now to throw the first stone?
Not the Bank of England, who jumped first and shamelessly into the quantitative easing (also known as debt monetization, banana republic financing and a host of other savoury qualifiers) Nor the Fed, which has already started the second such operation. Nor even the orthodoxly spoken ECB, which is carrying a QE program on the sly, called unlimited three month facility, which provides eternal roll-over of 3 month unlimited loans at 1% for EU banks and has even put itself out of the law by buying national debt bonds and even named a program for it (Securities Market Program – not too intuitive…)
So much for the effectiveness of rules-based independence of institutions or “automatic” rules. The EU and specially Germany, keep their faith on those as a substitute for federal action. They should know better. After all Germany was first to break the Stability Pact when it needed to finance unification and it found France willing to cooperate only four years after the Pact was imposed on Europe by… well, by Germany and France.
Central bankers all over the world have started feeling (qualitatively) uneasy about their lost independence. They rightly fear that, once they get the financing they needed, governments will be less inclined to do their hard bit (support growth with expenditure and structural policies) and their sacrifice will only bring inflation.
In panic, they start asking publicly for governments to do their part so they are not seen as bringing inflation in return of nothing, and they offer opinions on fiscal policy, something unthinkable only some months back. They do so here, here, here, here and here. Governments want more help from Central Banks and pay back in the same currency, here, here, here and here.
It’s a chicken and egg problem. Puppet and puppeteer are now inextricably linked and it’s impossible to say who controls who. Since perpetuum mobile devices defy the laws of thermodynamics, there must be some external force intervening here. I bet it is the wind of history.