The most important job in the world?

The most coveted job in the world is that of the central banker, who also arouses the hastiest of judgments, all over them like a rash, and sometimes even hate-filled. Vilified for exacerbating inequalities and dragged through the mud for maintaining zero interest rates, it’s only fair that we don’t try to claim bankers are responsible for funding terrorism or encouraging armed conflict as well…

Let us therefore consider the concept of seigniorage, that being the profit made by a central bank when it issues fiduciary money, that being cash. The US Federal Reserve, that is the biggest issuer of banknotes in the world, systematically generates profit (like all central banks) because it has in its ledgers a bond with a yield of around 4% for each dollar it prints. Since cash brings in no interest, and as its profitability on seigniorage equals the differential between what it makes on this bond that’s on its balance sheet and the note issued, the US central bank therefore makes 4% on every dollar printed. The profits of a central bank are therefore proportional to the amount of cash that it issues: its seigniorage of course increases as the amount of money in circulation increases. It’s an argument that comes to contradict those who claim that the sole objective of central banks, by discouraging the use of cash, is to reap even more profit for itself and for its government, since it is understood that the disappearance of cash would deprive it of this precious seigniorage.

The same goes for the raised interest rates that are a precious source of profit for a central bank. It never pays anything on banknotes but, on the other hand, makes 6%, 8%, perhaps even more on the bonds it must hold in contrast to the cash issued in the case of heightened inflation that necessitates higher rates. It’s a diametrically opposed showcase in terms of deflation (that our world has been going through for a decade), imposing miniscule rates that as a consequence reduce the central bank’s profits. May we no longer also intoxicate our minds with the interminable conspiracy theories that state that our central banks (the Fed, ECB etc.) are plotting together to impose a rate of 0 from which, in reality, it has nothing to gain.

It nevertheless remains that their mission, right now, is crucial,and this is why they are quite regularly on the receiving end of the wrath of political leaders on all sides, who seem to have found in them the ideal scapegoat. However, these non-elected individuals’ superpowers and independence are justified – historically – by the interventionism of the politicians in power who in the past have pretty much all stigmatised their central bankers for having fought  tooth and nail against inflationary pressures by actively raising rates, which of course slowed down the economy as a collateral effect. Much closer to home, didn’t Donald Trump openly mock and call into question the abilities of the current chair of his own central bank (who moreover is appointed by him), accusing him of working against Americans for not lowering rates?

So, yes, monetary creation, the definition of a corridor or of a target for inflation therefore incidentally creates winners and losers, and it’s probably for this reason that central bankers are subject to all kinds of attention, all kinds of criticism and fantasies. Nevertheless, it is solely because of the rolling back of the power of politicians, who are paralysed due to the recurring nature of elections, that the decision-making of the central bankers now spills over into the domain normally reserved for elected officials. To put the central bankers back in their hutch, and if our wish is that technocrats involve themselves only in technocracy, then the prerequisite is that politicians go back to doing politics, and above all that they do it properly. No, central bankers cannot forever be cleaning up the mess made by others, nor become the patron saints of desperate causes.