This week’s economic growth figures reaffirmed the message that removing restrictions on Covid-19 is causing a rapid return to economic growth. The United States and the United Kingdom recorded strong figures for the first part of the year, while official estimates for the euro area show significantly better than expected growth. And unlike last summer’s rushed attempt to return to “normalcy,” the production and distribution of highly effective vaccines provides a more reasonable basis for optimism about the future.
Yet, contrary to the economic wisdom of recent times, governments and monetary authorities show little sign of reducing the full-scale political support of the past year. The European Central Bank avoided a repeat of its disastrous post-2008 approach by announcing that it remained committed to its vast € 1.85 billion quantitative easing (QE) program or electronically created currency.
The ECB has even offered its continued support for “critical and timely” fiscal policies, encouraging national governments to support “businesses and households” through public spending. The contrast, again, with the eurozone crisis of the 2010s, in which the ECB helped impose drastic (and totally counterproductive) spending cuts in the most affected economies shows at least that some lessons have been learned.
Meanwhile, the United States has embarked on what Treasury Secretary Janet Yellen, in her previous role as Federal Reserve Chairman, called a “high pressure” economy, executing both fiscal policy and monetary policy to counter the damaging long-term effects of a recession. There is no sign that the Federal Reserve is curbing its $ 7.9 billion quantitative easing program or even adjusting interest rates (currently 0% to 0.25%). Coupled with Joe Biden’s ambitious $ 6.7 billion spending plans, of which $ 1.9 billion has already been voted on, the stage is set for a major, long-term change in how America’s economies work. and the euro area: higher public spending, looser monetary policy, and more direct government intervention to support their domestic industries through trade and investment policy.
However, this change in the direction of economic policy is causing a backlash. The latest contributor to the counteroffensive is former Bank of England Governor Mervyn King, who claimed last week in the Financial Time that the “deafening” silence of central banks “on the current high growth rates of … money” should be a cause for concern as it will lead to inflation. This is the same Mervyn King who not only started the Bank of England’s quantitative easing program – which in the decade since 2009 saw £ 895 billion of new money injected into the economy by the Bank – but which violated the alleged independence and neutrality of the Bank to offer support for the Conservative-Lib Dem government’s disastrous austerity program.
He still insists today that governments overspend, but he has apparently rediscovered the apparent merits of trying to contain inflation by controlling the money supply. Once upon a time, this vision of a simple link between money supply and inflation was called “monetarism”. The theory holds that more money being made available, with the supply of goods and services remaining the same, will simply lead to higher prices as those with the money try to outbid for the same scarce supply. of goods and services. . “Inflation,” argued its biggest supporter, Milton Friedman, “is always and everywhere a monetary phenomenon.”
Thinking so led governments like Margaret Thatcher’s to try to control the money supply in the economy in the early 1980s. The results were fundamentally terrible: the resulting rise in interest rates did. increase in value of the pound, thus helping the manufacturing industry to deal a blow from which it has never recovered. And the money supply itself fluctuated wildly, whatever formal targets the government and the Bank of England tried to set for themselves, with little relation to the rate of inflation.
Indeed, the amount of money circulating in a modern economy with a fully developed banking system owes more to the amount of money that banks are willing to create and lend, and to the amount of money that banks are willing to create and lend. people want to keep, only to the amount of money the government wants there to be. Inflation was down when Thatcher took office, and increased when she left – money supply targets having been abandoned a few years earlier. Monetarism has since been largely discredited, and attempts to resuscitate it are likely to prove equally unsuccessful.
This is not to say that inflation is not, as some more enthusiastic Keynesian economists might argue, that there is no reason to think. But it will not result from an oversupply of money. Instead, it will be the change in the actual balance of costs and labor market conditions that are more likely to drive up consumer prices.
After decades of acting as a great deflationary sink for the global economy, helping fuel the decades-long Western consumer boom, China’s production costs have risen rapidly. Salary increases of 25 percent were reported in Shenzhen and other manufacturing centers ahead of the Chinese New Year, with some reported manufacturing wages exceeding typical graduate wages. Exporting these higher prices will most likely fuel higher prices across the world, while constraints on labor supply everywhere are already driving up wages. Bad for the inflation hawks and 1980s flashbacks, perhaps – but good for working people everywhere.