Central bankers have recently sparked fear and loathing in politicians, technocrats and the German press. Jerome Powell, the head of the US Federal Reserve, and Mario Draghi, the outgoing president of the European Central Bank, found themselves pinned down like voodoo dolls.
Donald Trump used Twitter to press yet another sharp verbal pin into Powell, blaming the Fed for the “very strong dollar”. Germany’s Bild newspaper depicted Draghi as Dracula and declared that “the horror for German savers is continuing”. Central bankers gave up appearing reserved and detached and instead lashed out. Dutch, Austrian and German technocrats, led by Bundesbank president Jens Weidmann, made bizarre and frankly alarming attacks on Draghi. It was not dignified.
The cause? The contradictions and confusion at the heart of today’s economic model. Its key features were neatly encapsulated by another reviled figure: David Cameron. “While we may be fiscal conservatives,” Cameron told a Davos audience in 2012, “we are monetary radicals injecting cash into the banking system and introducing credit easing measures”. Alongside this, he added, were “an aggressive set of plans” such as slashing government spending, cutting welfare payments and public sector pay, and increasing the state pension age.
Cameron was only parroting the key principles behind the dominant global economic model — promoted across Europe and upheld by professional economists in universities, treasuries and central banks. The adoption of expansionary monetary policy and contractionary fiscal policy is necessary, they argue, to tackle an unresolved financial crisis: low inflation, low wages, anaemic levels of investment and public sector deficits.
It’s crackpot economics, in my view, and worse, it has not worked. The European economy, far from recovering, is sliding back into recession. Despite the injection of trillions of euros into the eurozone, inflation remains dormant, with Draghi fearful of deflation. Interest rates continue to slump into negative territory as anxious investors pay governments to park their savings in bonds or bunds. German savers earn little in interest, and are agitated. Positive rates in the US drive investors to channel money into the dollar, causing that currency to strengthen.
Nobody is happy. The crisis isn’t fixed and the public finances of European governments remain unbalanced. Deploying low interest rates and the central bank “bazooka” to bestow largesse on the finance sector has had predictable consequences. The policy enriches owners of assets who use expansionary monetary policy to speculate and inflate the value of both financial and other assets. Fiscal policy by contrast has been contractionary across Europe. As a result, government investment in infrastructure, jobs and public services has been “aggressively” slashed, deflating incomes.
This ongoing conflict between the two most important economic levers available to policy-makers has had a predictable outcome. It has increased the wealth of the 1 per cent, but also contracted economic activity (GDP). Lower economic activity has contracted income — for both the private and public sectors. Lower income for government (tax revenues) has led to a rise in government deficits, and worsened public debt.
Cuts in government spending, falling prices, and low wages and profits all slash income, including government income. By inflating assets, while deflating income in the real economy, policy-makers are driving the European economy back into recession. They have reignited the threat of deflation and been forced to lower rates. Above all, deflating Europe’s income means public debt remains high. These outcomes have enraged fiscal conservatives, infuriated German savers and led to obscene levels of inequality across Europe. They have in turn incited political insurgencies, and hastened the rise of the authoritarian right.
To restore sanity, political stability and the public finances, policy-makers must stop demonising the officials and technocrats faithfully carrying out the contradictory policies of the dominant economic model. The problem lies with orthodox economics and the economics profession.
Ann Pettifor is director of Prime: Policy Research in Macroeconomics and the author of The Case for the Green New Deal