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Central Bankers Break a Sweat

Walter Russell Mead

The world’s central bankers, meeting in Jackson Hole, Wyoming later this week for their annual gathering, are nervous about how they might react to another financial downturn amid historically low interest rates. The Financial Times:

Last week John Williams, the president of the San Francisco Fed, floated reform ideas that challenged some of the basic assumptions of the central banking tribe. Among his suggestions was the idea of aiming for a higher inflation target to boost central banks’ room for manoeuvre when a downturn strikes. […]

“This debate is really about the next recession and how much room there will be to act against it,” says Donald Kohn, a former vice-chairman of the Federal Reserve Board who is now at Brookings. “We do need a further rethink about how much scope central banks have to ease.”

The problem is that almost a decade after the financial crash, the world’s leading economies are continuing to struggle—low interest rates haven’t ignited a new era of strong economic growth.

For now, that’s a problem for retirees who can’t earn money on their savings, and for pension funds that are being driven toward ever riskier and more exotic investments in the quest for yield. Asset markets have been systematically distorted by the consequences of ultra-low interest rates, but otherwise it’s something we can live with. The problem is that at some point, perhaps in the not too distant future, the current economic expansion will come to an end. Capitalist economies are cyclical; expansions and recessions are both part of the process, and sooner or later, the next recession has to arrive. The question is: if interest rates are at or near zero when the next recession comes, what can the economic technocrats do to stimulate growth?

It seems increasingly clear that the world economy has grown beyond our ability to understand the forces at work. Globalization, massive over-investment by export oriented behemoths like China, the rise of the information economy, large demographic shifts: these seem to be changing the rules of the game in ways that we have yet to understand, much less manage. Economists are as dogmatic and as self-assured as ever, but economies remain mysterious and uncontrollable.

The technocratic dream of a flawless economic model that, properly applied, produces endless and effortless prosperity, is something we will never have. Human beings are too quirky and technological change is too unpredictable for that ever to happen. The economy remains unpredictable and uncontrollable; history remains a roller coaster with wild plunges, dizzying turns, and the occasional loop-the-loop.

The only thing we know about the future of the economy is that it will continue to surprise us. The central bankers assembling for their annual get together in Jackson Hole are powerless to prevent it.

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