Economists on the verge of nervous breakdown

Central banks are lost, and central bankers are now blatantly admitting that their tools and other monetary policy instruments used for decades to correct economic cycles no longer work!

Yes: they have lost their magic touch, these central banks which are no longer omnipotent, including the most powerful of them, namely the US Federal Reserve.

They who enjoy – and who are, quite rightly, proud and jealous – of their independence vis-à-vis the political powers and the bureaucracy of the States, they who have benefited for a long time from the quasi-miraculous and privileged power of regulation of cycles of economic activity, they who have long assumed the – sometimes unpopular and often controversial – decisions on interest rates while ostensibly displaying their indifference to political pressures, it is now they who plead for public spending, for fiscal policy and for taxation to come to the rescue – which in itself is an implicit acknowledgment of their weakness.

By sacrificing everything to the dogma of 2% inflation …

Does this mean that the paradigm on which they were built, and which consisted in stabilizing the system following the banking panics of the 19th and the beginning of the 20th centuries, has become outdated, obsolete? They who, after Bretton Woods and after the establishment of floating exchange rates, were the guardians of this sacrosanct price stability theorized by Milton Friedman.

Unfortunately, they concentrated all their efforts on monitoring the quasi-dogmatic level of 2% inflation which was the critical threshold not to be exceeded in order for this system to prosper.

They sacrificed everything in the light of this 2% pushback, including the preservation of full employment and the promotion of growth relegated far, far behind the protection of savers and pensioners.

A victory in the form of collective suicide

Ironically, it would be tempting today to congratulate them. Did they not win handily this fight against inflation which is now an extraordinarily scarce commodity? In fact, the combination of their obsession with inflation, their focus on this one and only priority, and the proliferation of this 2% tier across all central banks around the world (which in this way followed the Fed and the ECB after the Bundesbank) has engendered a sort of collective suicide because no one currently knows how to bring back a little inflation.

But let’s not throw stones at central bankers alone because it is, in reality, the entire corporation of traditional, orthodox, “mainstream” economists which is now on an ejection seat for not having wanted to admit that capitalism is fundamentally vector of instability, and for not wanting to integrate essential components – such as debt and money – into their economic models.

“One funeral at a time”: the slow advance of new ideas

Yet it was enough to be interested in the work and the hypothesis of financial instability of Hyman Minsky to depart – or at least to question – their certainties as to the balance of the markets and the economy to which clings always a certain number of them! However, crises are inevitable, human speculative bubbles, as are untenable certain levels of private sector indebtedness that generate deep imbalances that require violent adjustments at regular intervals.

The experience of Men shows that it is very difficult for them to question the intellectual patterns in which they are comfortably installed, that it is almost impossible for them to adopt others that are more radical. Deploring the lack of enthusiasm of his contemporaries for his yet brilliant discoveries on electromagnetism, the physicist Max Planck noted that science is advancing only “one burial at a time”. The same goes for the economy and for the financial markets – it is true – familiar with the massacres.