I thought I would share some of my recent comments on the view of the next Bank of England Governor Mark Carney that central banks could consider more radical measures such as growth targets. The Chancellor has said that it is "good there is a debate" over the Bank of England's inflation target policy.
I think it would be a mistake to extend the Bank of England’s targets for a number of reasons. Central bankers should only concern themselves with sound money which includes inflation and, if they have got the authority to regulate it, the safety of the financial system. Any targets other than those, such as promoting growth or employment, takes them into territory which should be reserved for elected politicians and would only serve to confuse or conflict with their core mandate. Indeed, the core role of central bankers is to prevent politicians, most or all of whom seem to have (re)election as their main aim, perverting the currency and/or the financial system in pursuit of their careers.
I discussed this topic on the BBC Radio 4 Today Programme last week. You can listen to the interview in full here (click forward to 1:51).
I think it is premature for George Osborne to have declared that Mr Carney is the outstanding, preeminent central bank of his generation. Canada’s good performance during the credit crisis cannot be attributed to him as he only became Governor in 2008 by which time the die was well and truly cast. Canada’s success owes far more to the foundations from the actions of the Canadian government which took office in 1994 and resolved to turn a deficit of 10% of GDP into a surplus which it achieved in three years. It is also worth noting that Mr Carney will leave his post after rapid inflation of Canadian property prices which looks like it may cause a problem.
Mr Carney has the advantage of youth. He has the disadvantage that he has never lived through a period of high inflation. But he may get to do so. The debate about central bank policy aims which he sparked comes hot on the heels of the Fed doubling the size of its monthly purchase of bonds in its programme of Quantitative Easing and proclaiming that it will continue with this policy until employment falls below 6.5%. It was swiftly followed by the landslide election victory of the LDP in Japan who say they will tell the Bank of Japan to pursue a 3% inflation target in order to promote growth.
None of these people fear inflation, which is exactly the time when it is likely to re-emerge. If it does so, it may not stop at convenient pre-ordained levels which these newly mandated central bankers are aiming for and if it does run out of control what levers will they pull to halt it? Raising interest rates? That would have an interesting effect on government finances and the economy.
In my view the world’s most outstanding extant central banker is Paul Volcker. Take a look at his track record on these matters.
I think it would be a mistake to extend the Bank of England’s targets for a number of reasons. Central bankers should only concern themselves with sound money which includes inflation and, if they have got the authority to regulate it, the safety of the financial system. Any targets other than those, such as promoting growth or employment, takes them into territory which should be reserved for elected politicians and would only serve to confuse or conflict with their core mandate. Indeed, the core role of central bankers is to prevent politicians, most or all of whom seem to have (re)election as their main aim, perverting the currency and/or the financial system in pursuit of their careers.
I discussed this topic on the BBC Radio 4 Today Programme last week. You can listen to the interview in full here (click forward to 1:51).
I think it is premature for George Osborne to have declared that Mr Carney is the outstanding, preeminent central bank of his generation. Canada’s good performance during the credit crisis cannot be attributed to him as he only became Governor in 2008 by which time the die was well and truly cast. Canada’s success owes far more to the foundations from the actions of the Canadian government which took office in 1994 and resolved to turn a deficit of 10% of GDP into a surplus which it achieved in three years. It is also worth noting that Mr Carney will leave his post after rapid inflation of Canadian property prices which looks like it may cause a problem.
Mr Carney has the advantage of youth. He has the disadvantage that he has never lived through a period of high inflation. But he may get to do so. The debate about central bank policy aims which he sparked comes hot on the heels of the Fed doubling the size of its monthly purchase of bonds in its programme of Quantitative Easing and proclaiming that it will continue with this policy until employment falls below 6.5%. It was swiftly followed by the landslide election victory of the LDP in Japan who say they will tell the Bank of Japan to pursue a 3% inflation target in order to promote growth.
None of these people fear inflation, which is exactly the time when it is likely to re-emerge. If it does so, it may not stop at convenient pre-ordained levels which these newly mandated central bankers are aiming for and if it does run out of control what levers will they pull to halt it? Raising interest rates? That would have an interesting effect on government finances and the economy.
In my view the world’s most outstanding extant central banker is Paul Volcker. Take a look at his track record on these matters.
Dear Sir,
I enjoy reading your posts and in the main I am in agreement with you! However this time I think you may be paying too much attention to our short term past with regard to inflation.
Since the B of E remit was changed in 1997 I was concerned that a remit purely with a focus on inflation was misguided and that the remit should consider inflation AND growth.
Now that circumstances have changed so significantly I am more than ever convinced of this need.
As you will know, monetary policy is so very useful and powerful because it can convey powerful messages to citizens, which they then act upon. (Theory of rational expectations).
It is because of this that I believe the focus of monetary policy now needs to change to one where much greater heed is paid to Economic Growth, as opposed to yesterdays war of fighting inflation.
Ah, the cries of 'yes but we will store up problems up for tomorrow'...
It is not so much the rate of inflation which is a problem, it is unexpected inflation, and a strong and credible central bank would be able to ensure that such a situation occurred.
The problem is that we remain focused on fighting inflation. In effect we are saying to economic agents, people and business, that they must still remain guarded. Put another way we are telling rational people to hold back. To constrict their spending, price setting and general activity because if we don't things may get out of hand and we may end up like Germany in the 1920's.......
Britain had problems with inflation in the 1970's because it was an inefficient old fashioned manufacturing economy and could not produce an increase in goods without unions demanding a bigger slice of the cake.
Britain today is a much more efficient and internationally diverse open economy. It is able to cope with many shocks to the system e.g. financial crisis of 2008, ERM fall out 1992, high commodity prices globally during the last 5 years. Despite these events and others, the economy still created 500k new jobs in the last year, something which I doubt would have been possible 30 years ago.
Times have changed and so it must be for monetary policy. Its is Christmas time and for the sake of a better economy in 2013 Central Bankers should be telling everyone to get the punch bowl out........
yours
Paul Coffin
www.investglobally.co.uk/blog
paulcoffin@yahoo.com
Posted by: Paul Coffin | 18 December 2012 at 10:29 AM
In all of this everyone has totally cast aside and forgotten Pensioners who have no option but to rely 90% on savings interest
Theres millions of them who went without there whole lives to save from low wages and taxed income for a crumb of comfort in old age .
They were denied the options of Company pension schemes etc and often had no option but to stay home and care for children and aging parents hence they do not even get full state pension.
Their reward now is to be royally ripped off in favour of Mervyn Kings rich friends
the B of E Pension Scheme and everyone who took out loans they could not afford
By robbing the prudent to benefit Bank bonuses and their ilk the trouble this country is storing up has yet to even be thought about by the Treasury
All of these Pensioners are no longer paying tax and will soon have to claim Pension Credit at what cost to the welfare budget ?
Small wonder newer generattions see no point in saving.
Yet each month Mervyn and all the other Central Bankers meet in Switzerland dining high on the hog in order to devise more and more schemes to rob every kind of Pensioner of their savings.
Theres 7 savers to every 1 mortgage holder and Cameron , Clegg and Osbourne all PROMISED to help savers .
instead between them all they have done is helped themselves to savers lives
Posted by: Helenjo78782592 | 18 December 2012 at 03:49 PM
Paul Coffin: I think we are going to have to agree to disagree but thank you for the contribution.
Posted by: Terry Smith | 19 December 2012 at 09:10 AM
If I thought we could create growth by destroying the currency, I might swallow my distaste at the Central Bankers' highly choreographed switch from inflation targeting and reserve judgement.
I had my doubts about Mr Carney anyway, despite the girlishly giggly hagiographies in the quality press. Anybody pursued so enthusiastically by this government and this chancellor is not going to be Volcker's natural heir.
As it stands, I think this may be time to embrace debt and gear up to the hilt. The chances that the combination of Central Bankers and politicians keeping this thing under control must be close to zero.
At least, high personal gearing might offset the wealth destruction heading towards my bond heavy pension funds when the tsunami arrives.
Paul Coffin; I suggest you watch the Martenson Crash Course.
Posted by: Alan Dykes | 19 December 2012 at 01:42 PM