For the last 14 years it has been said that with the lower interest rates and quantitative monetary policies Central banks (also called unconventional monetary measures or, in English, “quantitative easing”) were running out of ammunition.
In the face of these fears, every time I was asked what could be done in a new economic or financial emergency, my response during those 14 years has been invariably the same: more of the same.
And that is what central banks have been doing, to a greater or lesser extent, simultaneously or successively, since August 2007.
When last year around this time the pandemic was already evident, central banks were preparing precisely for that response: more of the same. Only the President of the ECB hesitated slightly, but the market put it in place in less than 24 hours: Christine Lagarde he would apologize the day after for a somewhat haughty response he had given at a press conference and would just do what the US Federal Reserve and everyone else did.
The thing was not very science, neither on my part nor on the part of central banks: the experience of the 1930s and the leadership of Ben Bernanke at the head of the Federal Reserve in 2007 left no room for doubt.
Furthermore, looking at it with a little more precision, neither the monetary restriction of the 1930s was as serious as the ill-fame of those years says, nor was Bernanke’s leadership so novel: the Bank of Japan it had already been practicing this loose monetary policy since the mid-1990s, after the double puncture of the housing bubble and the financial bubble, when the threat of imminent bankruptcy of the Japanese banks left him no other way than to lower interest rates to zero and inject liquidity into the system in massive amounts.
The Japanese government itself only had the alternative of increasing public spending (which it did, by the way, in the classic way: with public works).
In my usual response, I always said that this policy of injecting liquidity would be possible as long as there was no inflation, while affirming that I did not see inflation coming from anywhere. To that he used to add that he did not see, as others feared, that there was going to be deflation.
During the last fourteen years there has been neither inflation (which was still the obsessive fear of central banks, especially the ECB in 2012) nor deflation.
And, indeed, during the last fourteen years there has been neither inflation (which was still the obsessive fear of central banks, especially the ECB in 2012) nor deflation (which was the new obsession of central banks and which replaced the other obsession with inflation so ingrained since the 1970s; so, yes, justifiably).
But the year 2021 has arrived and the obsession with inflation seems to have suddenly resurfaced, not so much among central banks as in the analysis departments of investment banks and among the press that usually echoes what analysts of investment banks have their say. So, seen what is seen, Is it time to give up “more of the same”?
DO NOT. Even though someone as eminent as Robert Skidelsky (Keynes’s great biographer) claims otherwise. According to him, central banks have already run out of ammunition. Hence, he proposes that fiscal policy take over, which has the advantage that it can focus more on promoting investment in the sectors that governments deem appropriate, while monetary policies fire blindly.
The proposal sounds great, but given that: 1) for that a huge public expenditure will be needed, 2) that the current economic situation will not allow this increase in spending to be carried out without incurring very high budget deficits, and 3) if long-term interest rates are not wanted to go to levels much higher than the current ones. The conclusion is, again, “more of the same”: that central banks continue to buy massive amounts of public debt.
And it is to say that the central banks run out of ammunition is as much as to affirm that the angel / child who appeared to Saint Augustine on the beach had managed to put all the sea water in the bucket with which he played. A central bank always has ammunition. The water of its sea “never runs out”.
But what about inflation then? Well, although it is certainly a threat at this time, it is only a transitory threat, partly the result of the bottlenecks and dislocations in the global production chain caused by the pandemic, and partly the result of the “base effect” that arises from comparing the normal prices of the raw materials of today with the very depressed prices of those same raw materials of a year ago.
But what about inflation then? Well, although it is certainly a threat at this time, it is only a transitory threat
For example, if oil prices were to remain where they are today until April (which, on the other hand, are the same as before the pandemic) the annual increase in the price of oil in April will be 300%.
In other words, the price of oil will have multiplied by four, which will be reflected in a sharp rise in the annual CPI (only so far this year the price of unleaded gasoline in the wholesale market has risen 34%). But that is not why the price of oil will stop being at the same level as before the pandemic.
Over time, global production and distribution channels will return to normal and, furthermore, the inflationary effect of reversing the “one-shot” measures taken last year will also disappear.
A) Yes, the CPI has risen in January in Germany because the VAT reduction that was adopted to combat the economic effects of the pandemic has been eliminated. The one-time impact that is expected to cause a check for $ 1,300 to be sent to Americans will also disappear.
With an unemployment level as high as the current one; with unused capacity in the different industries due to sanitary restrictions, and with the behavior of credit as moderate as it is now, it will be extremely difficult for there to be a persistent rebound in inflation, a rebound of those that are difficult to combat and that carried in the past central banks to raise interest rates and end up causing a recession.
The dangers now are of another type and have to do with the secondary (and technical) effects that they sometimes cause in the liquidity conduction pipes
The dangers now are of another type and have to do with the secondary (and technical) effects that the mixture of leverage and regulations for banks sometimes causes in the conduction pipes of liquidity.
Although the “inflation fashion”, Together with these technical effects already under way, they are causing short-term disturbances in financial markets and are raising the profitability of public debt in all countries. Which will highlight that, once again, central banks will have no choice but to combat this rise and the need to finance budget deficits with measures to purchase the same public debt.
That is, with more of the same …
And it is that, in the markets, fashions are created that are not very different from what is the annual ritornel of clothing fashions: if there is not a different fashion every year, there is no way to earn money. Hence, the markets apply the story in a more or less intentional and coordinated way and that their fashion this year is that of inflation. In this, markets are also “fiercely human.” They only do what has always been done. That is, more of the same.