Eccentric yes, but central bankers are a long way
from playboy billionaire geniuses with hidden superpowers...
can't leap tall buildings in a
single bound then.
"Monetary policy can be a powerful tool, but it is not a panacea for the
problems currently faced by the US economy," confessed US Fed chairman
Ben Bernanke last October. "There's a limit to what monetary policy can hope to
achieve," agreed the Bank of England's Mervyn King
the following month. "Monetary policy cannot do
everything," sighed the ECB's Mario Draghi,
speaking to the Financial Times in December.
Okay, so these guys are a long way from that
"group of remarkable people" brought together by Samuel L.Jackson's growl "to fight the battles we never could"
in the new Marvel Avengers movie.
But couldn't they at least wear their underpants
outside their trousers?
"Maintaining price stability and
financial system stability are important goals of central banks," added
Bank of Japan boss Masaaki Shirakawa at the start of this year, "but central banks are not able to solve
all problems, especially in an economy characterized by zero interest rates
Such pessimism surely jars with central banking's awesome powers. A century
ago, before the gamma ray accident, "the Gold Standard determine[d] the
money supply," as Dr.Bernanke told his George
Washington students (and anyone who'd listen on the internet) last month. So "there [was] not much scope
for the central bank to use monetary policy to stabilize the economy."
Yet today, central-banking-policy-man still finds himself
unable to fix the economy, even though both the cost of money and its supply
now lie entirely within his gift. Here sit Bernanke, Draghi,
Shirakawa and King – not a laser-glove
between them – unable to reverse the spin of the earth on its axis. But
they can make it spin faster.
"Of course, the inflation forecast is higher now than it was...precisely
because rightly we did more QE," declared Bank of England policy voter
Adam Posen in one of two newspaper interviews on Thursday last week. You'll note that word
"rightly". The arch-dove of Threadneedle
Street, Posen this month failed to vote for yet more quantitative easing
– a decision he feels he should come out and defend
in public. Twice. Not because anyone thinks he should have printed more money
instead, pulling the big lever marked "inflate" to buy more
government bonds, push up gilt prices, and drive down interest rates further
below the pace of inflation. No, Posen chose to defend his "no
change" vote because it was so out of character.
After joining the Bank of England's policy committee in Sept. 2009, Adam
Posen voted to expand the UK's money-creation scheme at 16 of the 31 meetings he attended to March 2012. His fellow
policymakers backed his call only twice, but that was enough to take the
total up to £325 billion – well over 20% of the UK's annual
economy, and equal to more than one third of all the UK government debt now
The effect? Never mind that Posen finally changed his vote this April. As his
governor and the other 3 chief central bankers above all confess, creating
money and handing it straight to the banks did nothing to fix the economy. But the one sure outcome, as Posen noted this
week, was to send Consumer Price inflation sharply higher – well above
the Bank of England's official 2.0% annual target in fact,
and sharply above its 10- and 20-year averages, too.
Indeed, on the old, more comprehensive Retail Price Index, inflation has
accelerated across the board since March 2009, when "quantitative
easing" was first applied in the UK. It shot higher from its one- and
two-decade averages in 11 of the 14 separate item categories compiled by the
official data agency (food, clothing & footwear, household services etc). Excluding mortgage-interest payments, the
once-authoritative RPIX index has risen 4.5% per annum since March 2009
against 3.1% since 1992 and 3.4% since 2002.
Is anyone amazed by such exploits? Exploding the money supply can't be
guaranteed to destroy the value of cash, as Japan's experience over the last
decade shows. But crushing the purchasing power of people's income and
savings is a more certain power for central bankers to summon up than
anything else. Because in the final analysis, "under a paper-money
system, a determined government can always generate higher spending and hence
positive inflation," as Ben Bernanke concluded his infamous "Deflation" speech of Nov. 2002.
Destroying money by printing it to
excess is easy. The truly superhuman task will be killing inflation after
it's really shown up.