Volcker speaks out on central bank policies

Economic growth


Core slide.pngCentral bankers clearly read too many super-hero comics when they were young. Ben Bernanke at the US Federal Reserve, Mario Draghi at the European Central Bank, Mervyn King at the Bank of England and now Haruhiko Kuroda at the Bank of Japan, all see themselves as Superman solving the world financial crisis.

The only problem is that they are solving the wrong problem. As the slide above argues, based on our analysis in Boom, Gloom and the New Normal, it is completely wrong to suggest that today’s problems have the same underlying cause as the Great Depression in the 1930s. They are in fact caused by a perfectly natural, and entirely welcome development:

• Life expectancy has almost doubled over the past 100 years in the West, and almost trebled in the emerging economies
• As a result, fertility rates have almost halved in the West since 1950, and more than halved in emerging economies

We therefore have an entirely new generation of older people, the New Old 55+, alive for the very first time in history. Equally women no longer have to have large numbers of children, in order to ensure that they have some support in their old age.

Does anybody seriously think these are ‘bad things’, or ‘problems’ that needs solving? Of course not. They are surely one of the greatest achievements of modern society, and should be celebrated as such.

But what these changes also mean is that economic growth will be much slower in the future. Firstly, there are fewer younger people alive to do the ‘heavy lifting’ for the economy. And secondly, older people buyer fewer new things, as they already own much of what they require.

Thus the blog is delighted to see the words of wisdom from a former US Fed Chairman Paul Volcker. Central bankers do no normally criticise each other, but as Gillian Tett in the Financial Times reports, his meaning is clear:

“Central banks are no longer [acting like] central banks,” he warned, amid a discussion about Japanese and American monetary policy. “I think it gets dangerous when they lose sight of the basic function of the central bank.”

The key issue concerns what this “function” should be. In recent years, it has generally been assumed that a central bank’s core mandate is to keep inflation low and growth on track (and, in the case of the US, to deliver low unemployment too). Mr Volcker disagrees. “The basic function of a central bank is to defend the value of the currency,” he insists.

Ms Tett concludes that Volcker’s highly successful experience in the 1980s “also taught him how limited a central banker’s powers really are”.

Ben Bernanke and his friends are not the super-heroes they imagine. Companies instead need to put their trust in business model and technical innovation, and not wait for Super Mario and his friends to rescue them.


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