Volcker speaks out on central bank policies

Economic growth

SHARE THIS STORY

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.

PREVIOUS POST

China's need to clean up pollution will slow economic growth

11/04/2013

Pollution is, unfortunately, one of the downsides of industrial development. Luc...

Learn more
NEXT POST

Crude oil's slide puts markets under pressure

15/04/2013

Crude oil markets long ago lost their role of price discovery. Since early 2009,...

Learn more
More posts
Merkel warns of need to prepare for No Deal Brexit
05/07/2020

Most people missed the fact that last Tuesday was the last possible date to delay the UK’s exi...

Read
World moves from Denial to Anger, as the Paradigm of Loss moves forward
07/06/2020

I have been warning about the Covid-19 risk since early February, and in April suggested here that: ...

Read
The New Normal for global industry
31/05/2020

The global chemical industry is the third largest sector in the world behind agriculture and energy,...

Read
Debt, deflation, demographics and Brexit set to challenge London house prices
17/05/2020

London property websites haven’t used the word “reduced” for many years. But it...

Read
The bill for two decades of doomed stimulus measures is due
03/05/2020

The Financial Times kindly made my letter on the risks now associated with central bank stimulus the...

Read
Local supply chains replace global trade as world starts to “do more with less”
26/04/2020

Something quite dramatic is happening in the global economy.  Of course, Wall Street analysts still...

Read
Financial markets enter their Convulsion phase
19/04/2020

Many companies and investors are still comparing today’s downturn to the 9-month hiccups seen afte...

Read
World risks moving from Denial into Anger as the Paradigm of Loss moves forward
12/04/2020

The head of the IMF has warned again on the likely scale of the economic depression ahead: “Gl...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more