Pendulum likely to will swing against central bank independence in coming years as governments try to wrest control of money from the technocrats
Ms Lagarde’s hauteur only reinforces that 2022 will be remembered – in economic circles at least – as the year the world’s central bankers were exposed as having feet of clay. Will 2023 be the year that central bankers fall to earth?
Governments seeking re-election will always run the economy “hotter”, risking inflation but bragging about how brilliant their economic management is, based on higher levels of employment, wages and growth. The unelected central banker has no compulsion to chest-thump about growth. More concerned about resulting inflation, the central banker’s weapon is raising interest rates to cool things down.
Constant agitation for independence bore fruit throughout the 1980s, and one by one central banks became independent. The technocrats had control of the most important substance in the economy, money, giving technocrats enormous power over the electorate, yet they were accountable to no one. Sceptics point out that the low-inflation period of the past 25 years is due to a combination of factors that had nothing to do with central bankers at all. The emergence of China into the global economy doubled the global workforce, pushing down wages. Energy prices have been low relative to the 1970s, keeping a cap on costs, and engineering innovation was driving down the costs of using technology. Consider how dependent you are on your phone now for both work and play.
At a global level, the gas and price cap on Russian energy is coming from governments, not central bankers, who are in a bind because, having blown up an asset price bubble with easy money, they can’t now deflate that bubble too quickly without risking another 2008-style global financial crisis.
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