Central banker: “It’s the story of a guy…”

Posted on November 21, 2022


Coluche in his time proposed to us a story which had neither head nor tail, neither beginning nor fall and of which we are still looking for the why and how.

Curiously, it may well be that a few decades later we have finally found the candidate fitting the mustachioed profile of Coluche’s joke. It’s about the central banker, a guy who tells us a story that we have trouble understanding and then we realize that it does not hold water and which seems to end in blood sausage.

Inflation is a miracle!

Maybe inflation is a miracle, something that should never have happened?

We spent almost 40 years with inflation ranging between 1 and 2%, and suddenly here we are at 4% then 5% and today 8% or even 10% for some. Are we dealing with a miracle? Mere coincidence or implacable necessity? david humeone of the founding fathers of empiricism (skeptical version) will adopt a very minimalist approach allowing to decide between several interpretations of a divisive fact: “we must always reject the greatest miracle”.

Inflation did not resort to the divine or the supernatural to spring out of nowhere.

Inflation has only increased because there has been an abysmal imbalance between, on the one hand, the supply of goods confined (crisis linked to covid) then confiscated (Ukrainian conflict) and rationed (climate crisis) and the other side is demand kept afloat by the authorities (whatever the cost). Can we still say that inflation is a kind of miracle? Yes, but it is a miracle less flashy, less demanding than one invoking the divine. The miracle in question here invokes the plausibility of the fact, its likelihood. In our case, inflation was unlikely but it happened. It would therefore be a form of miracle.

Indeed, inflation was unlikely, just bad luck in truth, the result of a bad series as we have never known. Just think: what was the probability that a global health crisis would force the planet to go into apnea for almost two years and even more if we think of China and to its zero tolerance policy ? How likely was a major geopolitical crisis to come knocking on the West’s door again, and even more so if you think of China and his views on Taiwan ?

In short, inflation was not impossible but largely improbable since it presupposed the near joint occurrence of the three aforementioned disasters.

Central banker: “when I am in doubt…”

Ruminating on his transitory inflation, the central banker then chooses to practice a kind of silent melancholy. He doesn’t know if he knows enough and his silence is irritating. Aphasic, apathetic, everything goes and everything suits him. He doesn’t seem to be reacting anymore to the pin under his buttocks which should make him jiggle in his chair. He is criticized for a certain naivety in thinking that the D cap of inflation will eventually adjust to the more modest size of the economic corset.

Asked to choose between what could be called a fact (high inflation) and what could be called faith (transient inflation), he first chooses not to choose. He then officially positions himself on a crest line, a kind of in-between of monetary agnosticism. It must be said that the situation is critical. Acting on inflation will do some collateral damage. The central bank would like to curb inflation without curbing the rest. But it is impossible, she knows well that to calm inflation, she will have to stun theHomo economicus with interest rate hikes, a reduction in the size of its balance sheet and, overall, a less accommodating monetary policy.

The central bank would like to shake off inflation without preventing the economic planet from turning. But nothing can be done, she doesn’t know how to whip the top, this art of giving the top strong whipping blows in order to keep it moving. The central bank cannot simply punish inflation. She must punish everyone. There is no retributive justice possible. Everyone must be punished for the fault of one: inflation. Consumers, companies, financial markets and even governments will have to participate in the penalty.

The central bank may be a magician but not a contortionist. She can take money out of your hat, grow debt ad infinitum, transform an unprofitable project into a perpetual annuity. But it cannot hold inflation with one hand and the markets with the other. It cannot raise its key rates to fight inflation and lower them at the same time to save the markets. The central bank is paradoxical, not contradictory: it smashes economic dogma, not the laws of logic.

The end of dogmatic sleep

Dogma and fact are stubborn but fact is usually more persuasive.

Believe it or not, inflation is there. That said, one can be stubborn but not obtuse. Thus, the dogmatist can very well accept being wrong if it is proved to him that he is not right. Central banks therefore preferred to bend rather than be accused of dogmatic sleep (Kant). Transient inflation has lost its epithet. The transient time has expired. Accused of stupefaction in the face of lasting inflation, they finally decided to react. Remorse rather than regret.

Since then, central banks have been sailing on sight and this is perhaps good news.

Indeed, in a world shrouded in uncertainty, the art of monetary improvisation is particularly recommended rather than the austere interpretation of a restrictive policy. Crises and missteps succeeding one another, the central banker has therefore naturally developed an obsessive complex. Convinced that the world is after him, he then goes on the defensive, he opts for an unsteady gait, hesitant steps, soft words, and shifty eyes. It is a question of avoiding any message that is too loud so as not to inspire an exuberant reaction from the markets. From where a natural inclination with the conjuratory thought consisting in waiting for the worst to be disappointed in good.

And if monetary policy does not recite its lesson to the letter, that may be good news. Admittedly, this could pass for amateurism, or even incompetence. But in truth it is a policy much more in tune with a reality that has become capricious.

“We are living through a series of timeless shocks,” Adorno had already said.

From now on, it seems that there is no longer any possible narrative. The model seems to come up against a wall of uncertainties. So you have to improvise, which doesn’t mean doing just anything, but doing it with what you have. A kind of adventure on Thésée’s boat that is repaired with the only materials available, without being at the quay. Music is probably the field where the art of improvisation produces the most impressive miracles. Formerly, Mozart, Chopin, or Liszt or more recently Keith Jarrett, were not the last to improvise during their performances, demonstrating that their talent was not limited to the only composition or interpretation. And there is no need to mention the supernatural, divine intervention or trickery. In truth, the masters of improvisation never leave empty-handed when they embark on a production without a net in front of their audience.

Just like the contemporary central banker who starts from a theme he knows well, the fight against inflation, but adds his personal effects inspired by the moment. A true artist, I tell you.

Central banker: “It’s the story of a guy…”