The Fed Was Totally Wrong on Inflation, but Here Are Some Arguments That Could Exonerate It.
The ECB and other major central banks have obviously followed the Fed's lead.
Central bankers, led by Jerome Powell, had promised us for months that inflation would be transitory. Reality has caught up with the Fed and the ECB, and everyone can now agree that inflation is not transitory. Jerome Powell expected inflation to be 2% in America, it is still very close to 9% in July 2022.
The Fed and the ECB were supposed to make sure that didn't happen, but it did. You could say they failed. Faced with this failure, the Fed and the ECB are being put on notice to defend themselves, because everyone has already declared them guilty.
It is therefore a delicate period for central bankers. And yet, some nice arguments could help them plead their case. Too original, perhaps, in the face of collective hysteria, the risk is that these arguments will make their case worse. “And this will seem very nice to the educated man but will displease the ignorant very much,” Moses ben Maimon, Guide for the Perplexed. But just for fun, let's make a list of those arguments that could help Jerome Powell and Christine Lagarde in their difficult time.
Central bankers in denial of responsibility
When faced with the problem of rising prices, here's what a central banker might say:
“If you have a problem with prices going up, talk to the people who make them go up.”
Surely it wasn't the Fed or the ECB that changed the prices on the labels. Central banks do have powers, but they don't have all the powers. They can't push prices down to keep them from going up. They can, however, hold them back by pulling the reins, so to speak, which means tightening monetary policy harder and faster. In this case, they have not done so.
Responsible but not guilty. After all, it is fashion. Isn't that the way to treat the future of our young generations?
The toe policy
Very difficult to move a toe without moving the other toes. But apart from technical curiosity, this is not a serious handicap in everyday life. It is quite another thing for the central banker who would like to be able to lower inflation without lowering demand, raising unemployment, increasing discontent, etc...
But no, the central banker has no other choice than the toe policy of either lowering everything or lowering nothing. In the past, the medicine of the time proposed bloodletting to make the disease go away. Faced with this dilemma, the central banks decided that the game was not worth the candle and that the balance of benefits and risks favored the status quo.
They had to choose sides. Central banks chose the wrong one.
Monetary wokism
You can blame Larry Summers for many things, but certainly not for warning us about the unbearable laxity of the Fed, the ECB, and the other major central banks. Today, he has even found a new argument since the others were getting old: monetary wokism!
According to Larry Summers, our central bankers, dumbed down by 40 years of disinflation, would have exapted their supreme organs, initially intended to contain inflation, for another function more in line with the times: social justice. Except that Larry Summers knew that inflation was not dead, just lurking in the corner.
“No one will conclude from the death of the spinning wheel that the spinner is dead.”
- Schopenhauer
But there is a subtle difference between being blind and being blind. Larry Summers' criticism of Jerome Powell, Christine Lagarde, and Co. is that they are dogmatically blind. While the central banks invoke the absence of visibility, making them de facto blind to the event.
Finally, what we can reproach to central banks is just to have decided to think about tomorrow (social justice, climate ...), while they should have waited for the present to show up (inflation).
The principle of extensionality
If the endings are the same, you'd think the stories would be too. There is inflation at the end of the story, you were told that there would be inflation. So the story I'm telling you is the story that happened. Except that there are lots of ways to have inflation. And it turns out that the one that the warmists are talking about is not quite the one that happened.
GDP didn't soar beyond reasonable levels (potential GDP), spurred on by exuberantly supportive policies, inviting inflation out of nowhere. GDP has barely returned to its pre-crisis level in Europe and is a little higher in the US. But this is a far cry from the 10% or even 20% excess GDP invoked by the doomsday oracles just before the Biden cheques were handed out.
Of course, there was a positive demand shock, but the main thing is a negative mega-supply shock. Of course, purists will object that a supply shock is not likely to move prices, but relative prices:
“If good A is scarcer, it is more expensive, but since my income is constant, I must pay less for good B, to compensate.”
Just goes to show, that debate can be constructive.
The inflationary straw man
In the land of bad faith, a recurring fallacy comes up again and again:
“You didn't want to raise interest rates early enough, I don't understand why you let inflation soar.”
This fallacy makes one person say what he never said to the other: the central banker then looks like a straw man. And it works. Except that the authorities never said they wanted to let inflation run away. They simply believed in transitory inflation because they believed in transitory scarcity, the story of supply eventually adjusting to demand. This never happened, the stitching up never happened. The supply remained stunned by the Covid shock, the waves of variants, and finally the Ukrainian conflict …
Difficult to predict the dice roll. But that's the game, when you're wrong you're bound to look like a fool, an incompetent, even a danger.
“The opposite of truth is stupidity”, as Deleuze rightly said.
Some reading
Who Is the Current Winner of the War in Ukraine? America and It Is the US Dollar That Tells Us So. The impressive strength of the US dollar does not lie.
Bottom or Not Bottom for Bitcoin? Here Are Some Thoughts on the Matter. Looking where you need to will help you see more clearly.
Rather Than the End of Abundance, It Is Sustainable Abundance That We Must Aim for. Emmanuel Macron is wrong.
In the Wake of the Fed, the ECB Is Bound to Have a Heavy Hand in Raising Rates. A 75 basis point increase is more than likely on September 8.
Loved in the World, Hated in Russia — This Is the Legacy of Mikhail Gorbachev. His death at a time when Putin is inflicting a three-decade setback on the Russian people is a strange symbol of history.
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Please, defend them, exonerate them, but never forget they told the world that creating 10 trillions of dollars would not be inflationary or "transitory." Well, maybe they never read Bastiat or von Mises. They skip over that in Princeton, Cambridge, Yale, ad nauseum. That might be their defendable excuse.