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He’s missing the point, isn’t he?

One day someone will look back on the last year and the interest rate rises being pursued in the US, UK and beyond and wonder how an economic policy of such crass stupidity was ever allowed to happen. I have three explanations.

First, we took interest rates out of democratic control. Second, we handed the power to control them to technocratic bankers with substantial personal wealth meaning that they are insulated from almost all the economic pressures in life most people suffer.

And third, we told them they are wholly responsible for just one aspect of economic policy that is utterly unrelated to any other necessary policy to ensure we have a functioning state, economy and society. Having done so, their own disconnect from responsibility became complete.

Yes, we took monetary policy our of democratic control and invested it in the central bankers so as to remove monetary policy from democratic control. That was the point, the aim, the purpose.

The justification for that being that when we get politicians determining monetary policy we get Weimar, Venezuela, Zimbabwe and Turkey……

The point of an independent central bank is so that populists like Spuddo don’t gain control……

23 thoughts on “He’s missing the point, isn’t he?”

  1. “One day someone will look back on the last year…”

    And remark that it’s true that in times of turmoil, people will listen to any snake-oil salesman offering salvation, no matter how crazed or demented the solutions being offered are.

  2. I have three explanations.

    One has to be thankful it’s only three. If the Tuber-phone should ring there are probably more than seven steps in the process of Captain Potato donning his Potato-Cape and spudding to the rescue of the world economy.

  3. Tim, wonder if you saw the Financial Times opinion piece, which appears to be trial ballooning the idea that economic growth has now been successfully killed in Western Europe, and even cramming in more Africans can’t fix it:

    The Netherlands may be the first country to hit the limits of growth

  4. “nd third, we told them they are wholly responsible for just one aspect of economic policy that is utterly unrelated to any other necessary policy to ensure we have a functioning state, economy and society.”

    Is inflation really unrelated to the economy? That’s an amazing insight if so.

  5. “The justification for that being that when we get politicians determining monetary policy we get Weimar, Venezuela, Zimbabwe and Turkey……”

    Hmmm, remind me again how high inflation is right now, under the benign rule of our ‘independent’ monetary overlords? And OK, lets forget about the inflation caused by Uncle Vlads Dead Kennedys tribute act, his Holiday in Ukraine, and just look at where inflation was in February 2022 – 7% and rising rapidly. Even absent of higher energy prices inflation was over 3 times above the BoE’s target. Now whose fault was that? Was it the politicians who had managed to borrow £400bn entirely on their own to spaff up the wall on covid? No, it was enabled by the BoE. Your ‘independent’ monetary overseers thought it entirely sensible to give the politicians the keys to the money printer and let them get on with it. There’s absolutely no way the UK government could have borrowed that money on the open markets in the absence of QE hoovering up all the gilts issued, so the resulting inflation is down to the BoE who enabled it. And they did absolutely SFA to combat it. Interest rates were still only 0.5% in Feb 2022.

    If politicians had been in control of monetary policy and behaved like that the markets would have melted down, and forced a change of policy. But because the BoE is ‘independent’ they for some reason assume they know what they are doing. Thats a very dangerous assumption to make in this day and age, where most ‘experts’ are in fact just ideologues using their position of power to further their own pet ideological ends.

  6. @Jim: +1. The idea that ‘independent’ experts can make policy decisions without being political is intrinsically ridiculous. We haven’t isolated monetary policy from politics; we’ve just moved the politics to unaccountable appointees.

  7. Wholeheartedly agree with you, Jim. The problem is the “experts”. How’s the expertise defined? It’s certainly not on past performance. It’s self defined. So expertise ends up as agreeing with all the other ‘experts”.

  8. Didn’t Andrew Bailey pronounce after his meeting with Jeremy Hunt that they were “of one mind”? You would hope that ‘independence’ would be a little more arm’s length than that.

    As for the defining of expertise, that is established on the exciting new metric of ‘credentialism’ which is how Neil Ferguson can be consistently wrong year after year and still be treated as an expert.

  9. Bloke in North Dorset

    Whilst I’d prefer that politicians didn’t have direct control of monetary policy, some hubris from those who do control it wouldn’t go amiss:

    Chair Jerome Powell said that the Federal Reserve has over the past year learned ‘how little we understand inflation’ in remarks Wednesday.

    ‘I think we now understand better how little we understand about inflation,’ the chair divulged at the European Central Bank (ECB) Forum in Sintra, Portugal. ‘This was unpredicted.’

    ‘That’s not very reassuring,’ quipped Bloomberg TV’s Francine Lacqua.

    Powell said that there is ‘no guarantee’ the central bank can tame runaway inflation without hurting the job market.

    As Luis Zingales said on the most recent Capitalisn’t podcast: Inflation is always and everywhere a political phenomenon.

    Its just that its sometimes caused by bureaucrats playing politics.

  10. Everyone knows that the answer to inflation is to use the gold standard, or something like it, and nobody wants to dare the unpopularity of trying the experiment.

    Maybe Wee Nippie should try it for her new Scots currency. (Or she could go full Zimbabwe and just use the US dollar.)

  11. Every QE/QT decision is now an overtly political decision, whether yea or nay. Had Andrew Bailey agreed to start up the QE money printer to finance the Truss/Kwarteng budget they would still be in power. He didn’t so they aren’t. If he decides to start QT next month, and keep selling those gilts come what may, that could well usher in a Depression. This makes him the most powerful man in the country. He gets to decide who is the Prime Minister, and whether the UK has a functioning economy or not. And he is entirely outside of democratic accountability. Its a classic case of the old Tony Benn 5 questions test – What power do you have? Where did you get it from? In whose interest do you use it? To whom are you accountable? How do we get rid of you?

    If the government set interest rates and monetary policy I can at least complain directly to my MP about the mess they are making of it, as can every other citizen. And ultimately we could vote them out. How do I complain about the actions of the BoE, and remove them from power?

  12. And so its population mushroomed. When the counter hit 14 million in 1979, Queen Juliana said, “Our country is full.” In 2010, Statistics Netherlands said the population would probably never reach 18 million. Today it’s 17.7 million and rising. The country has 507 people per sq km, nearly five times the EU’s average.

    Central England (England minus the West Country, East Anglia, Northumbria and Cumbria) has over 700/km², more than 44 million people in 64,000 km² (cf 42,000 km² for NL). And that’s on 2010 census figures, which were notoriously under-counted, so you can probably add a few million to those numbers. I should think the population density of an area the size of the NL that included London would be well over 1,000/km².

  13. @dearieme: 20 years ago I attended a seminar at the NY Federal Reserve Bank. The comment was made that the UK stayed out of the euro out of concern for the Commonwealth countries. But, eventually, the UK would either need to adopt the euro or the US dollar.

  14. “The comment was made that the UK stayed out of the euro out of concern for the Commonwealth countries.” I hope that comment was ill founded. We should be run in our interest not the interest of foreigners.

    “eventually, the UK would either need to adopt the euro or the US dollar”: it’s quite possible that the GBP will outlast the Euro. It’s not actually inconceivable that it will outlast the USD (though I wouldn’t bet on it). I almost always disbelieve people who assure me that something financial is inevitable: how, I ask myself, does he expect to profit from saying that?

  15. The problem with central bank independence is that there seems to be zero effort made to ensure it does the thing it’s given independence for in the first place, i.e., ensure stability in the face of whatever wheezes politicians and their advisers come up with.

    So, the B of E misses its 2% inflation target (never mind whether that target is right or wrong), yet all it has to do is write a letter and it can ignore it. If A Bailey and the rest of the MPC got sacked automatically because they hadn’t jacked bank rate up to whatever level does the trick, then I would see the point of an arms-length central bank.

    But if it’s going to act either as a patsy of the government (e.g., when Johnson fancies a lockdown) or an opponent of the government (e.g., when Truss fancies freedom), then you might as well bring it under the electoral umbrella.

  16. I’ve noticed the same unacccountability in the High Court.

    When Bjelke cancelled the Queensland petrol tax, the High Court ruled that not having a petrol tax in one state was a breach of the Constitution.

  17. Another classic thread..Murphy lamenting the profits warning because of the Fed “maliciously” rising rates..insight into his mentality

    andrew says:
    October 28 2022 at 9:53 am
    Why are you so concerned a fall in consumption for largely discretionary (non essential) items which is what Amazons figures are saying. Surely this is a good thing for the preservation of the planet and something you would applaud?

    Richard Murphy says:
    October 28 2022 at 12:32 pm
    It is

    But it has to happen in a planned way

    This is not and so it is punishing people

    andrew says:
    October 28 2022 at 3:11 pm
    “But it has to happen in a planned way”

    What the hell does this mean? want to regulate through legislation how many jumpers or trainers people buy?..and can you sit around and wait?..a very odd comment to make

    Richard Murphy says:
    October 28 2022 at 6:48 pm
    Oh come on, stop being stupid

    Of course governments influence consumer behaviour

    And they will need to do so

  18. Stiv bators

    The ominous tones of ‘And they will need to do so’ –
    Similar to the FIRES document saying you will be limited to washing your clothes 11 times per year. The prospect of Such control is pulses (he’s gone vegan) and drink to a man like Murphy…

  19. @Jim – “And he is entirely outside of democratic accountability.”

    Since Parliament can at any time decide to fire him – just as it can decide to fire anybody within the juridiction. For some people, that might require nationalising their employer first, but the Bank of England was nationalised in 1946, so its governor is already a civil servant.

    And if you think that is not sufficient for democratic accountability, I must point out that it’s good enough for the Prime Minister.

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