Generals are often criticized for fighting the last war. What about central bankers who seem unable to grasp the lessons of the last emergency, still less to anticipate the next one? By putting central banks in charge of the response to the current crisis, governments risk a worldwide recession precipitated by excessive rate rises.
That was the warning from the United Nations Conference on Trade and Development (Unctad) this month, and it arrived not a moment too soon. Central banks cannot bring inflation down at a socially acceptable cost. Raising interest rates as pandemic support ends will hit incomes. The result will be akin to the “shock therapy” inflicted on voters by austerity policies after the financial crisis of 2008. The difference between then and now is that monetary tightening by central banks, rather than cutting government spending, is being used to engineer a downturn.
The U.S. Federal Reserve is the main culprit. Where it leads, others follow — leading to everyone squeezing their own economy simultaneously. The result, warns Unctad, could see $17tn wiped off global GDP. The Fed’s stance has already caused the currencies of about 90 developing countries to weaken against the dollar this year, making it harder for them to purchase goods priced in dollars, or pay back dollar-denominated debt. Many are plagued by blackouts and food shortages.
The surge in inflation from the end of last year belied hopes that this would be a temporary inconvenience. Russia’s invasion of Ukraine sent a shock wave through markets. Yet rising prices have not come from government spending or wage pressure. Inflation has been amplified by firms able to raise their markups to profit, first during the global recovery in 2021 and then in 2022, through excessive speculative trades on the backs of the world’s poor.
Companies have too much clout in world affairs. Half of the inflation in the U.S. is driven by higher profit margins — compared with 10% historically. In food, just four companies account for at least 70% of global grain trade, with an incentive to hold stocks back until prices peak. Financial investors are also cashing in. Seven out of 10 buyers of wheat futures contracts are now speculators. In 2018, they accounted for just 23% of purchasers. The record profit of $6.7bn made by the commodity trader Cargill last year makes the case for windfall taxes.
In the developing world, Unctad says growing corporate muscle has seen a fall in labor costs, while firms’ profitability has increased. When higher profit margins are a source of higher prices, raising interest rates is inefficient and unfair because the tightening needs to be larger to affect inflation, damaging growth and employment.
Since the 1980s, voters have forfeited economic power to the free market in exchange for stability and peace. They now feel duped. Debt-financed speculation and asset-price appreciation are accelerating a global inflationary crisis. There are obvious ecological reasons why the global energy system cannot carry on as it has. Greener and more redistributive policies are needed. Financial institutions ought to be rewired to serve a broader public remit. Interventionist government — armed with progressive taxes, anti-trust measures and price controls — should be the order of the day.
Unctad is right: the independence of central banks from any social goals is unsustainable. The suggestion of the Bank of England governor, Andrew Bailey, that even higher interest rates were needed after the new U.K. chancellor signaled public spending cuts and tax hikes sounds injudicious. The COVID crisis revealed that the trade-off where governments must choose between high deficit spending or low interest rates only exists if central banks want it to. Mr. Bailey has exposed the Bank to near comical U-turns for fear of being seen as subservient to politicians. His strategy risks plunging more people into poverty. Monetary policy is not apolitical, but it is undemocratic. That should change.
