Central Banks - Power Without Reponsibility?

[00:00:00] [SPEAKER_00]: The Why Curve with Phil Dobbie and Roger Herring

[00:00:04] [SPEAKER_03]: Central bankers

[00:00:05] [SPEAKER_03]: The big beasts of our monetary systems

[00:00:08] [SPEAKER_03]: The men and women who pull the levers of the global economy

[00:00:11] [SPEAKER_03]: A tweak on interest rates, an injection of capital, eyes firmly fixed on inflation

[00:00:16] [SPEAKER_03]: But does it really work? Are they the right people with the right insights to do their job?

[00:00:21] [SPEAKER_03]: After all, the global economy hasn't exactly had a smooth ride in the last few decades

[00:00:25] [SPEAKER_03]: So do we need someone else manning the brakes and accelerator?

[00:00:28] [SPEAKER_02]: Does central banking need a refit?

[00:00:32] [SPEAKER_00]: The Why Curve

[00:00:34] [SPEAKER_02]: It's curious isn't it, if we, this inflation thing is a bit of a global phenomenon

[00:00:38] [SPEAKER_02]: Apart from a few places like China and Japan

[00:00:42] [SPEAKER_02]: Well even Japan has got some now

[00:00:43] [SPEAKER_02]: Yeah, but I mean at a very low level compared to

[00:00:46] [SPEAKER_02]: But obviously it was suffering the complete opposite problem of deflation before

[00:00:50] [SPEAKER_02]: But so was most of the world actually

[00:00:52] [SPEAKER_02]: So we need to understand what the real reason is behind the inflation that we've been seeing

[00:00:57] [SPEAKER_02]: And whether monetary policy is the right thing

[00:00:59] [SPEAKER_02]: And why is it so different in so many other parts of the world?

[00:01:02] [SPEAKER_02]: So the Bank of England for example has taken interest rates up to five and a quarter percent

[00:01:06] [SPEAKER_02]: The Swiss National Bank, one and a quarter percent

[00:01:09] [SPEAKER_03]: Yes, and now the Americans seem about to bring down their rates

[00:01:12] [SPEAKER_03]: Yeah, places like Australia are saying we might have to put them up still

[00:01:17] [SPEAKER_03]: It's a bit discoordinated and yet they have this big meeting, Jackson Hole

[00:01:20] [SPEAKER_03]: All the central bankers pretty much

[00:01:22] [SPEAKER_03]: All gathering together

[00:01:23] [SPEAKER_03]: What an exciting event that would be

[00:01:24] [SPEAKER_03]: Amazing

[00:01:26] [SPEAKER_03]: Weekends spent with central bankers

[00:01:28] [SPEAKER_03]: The music, I mean you know the dancing

[00:01:30] [SPEAKER_03]: Exactly

[00:01:31] [SPEAKER_03]: The drink

[00:01:33] [SPEAKER_03]: But yeah, but essentially you assume there is coordination

[00:01:35] [SPEAKER_03]: So what you have is a network of people, mainly men has to be said

[00:01:39] [SPEAKER_03]: Who get together and sort of say yeah let's do this, let's tweak that, let's do the other

[00:01:44] [SPEAKER_03]: And then as you say it all seems a bit chaotic coming out of it

[00:01:47] [SPEAKER_02]: It does, yeah, there's a woman of course at the central bank for European Central Bank

[00:01:50] [SPEAKER_02]: I didn't say it was all men, but almost all men

[00:01:52] [SPEAKER_02]: Actually if you were there at Jackson Hole and you were serving the drinks

[00:01:55] [SPEAKER_02]: You'd want to keep pushing the prices up every day, wouldn't you?

[00:01:57] [SPEAKER_02]: Just to make the point

[00:01:59] [SPEAKER_02]: Really?

[00:02:00] [SPEAKER_02]: Gosh, I'm sure it was 50pc yesterday

[00:02:02] [SPEAKER_02]: Well you better do something about it then, haven't you?

[00:02:04] [SPEAKER_02]: But yeah, I wonder how it is going to be resolved

[00:02:06] [SPEAKER_02]: And then you've got people like Kamala Harris for example saying

[00:02:08] [SPEAKER_02]: Well actually, price control is the way forwards

[00:02:11] [SPEAKER_02]: As though corporate profiteering has been part of the problem

[00:02:14] [SPEAKER_02]: Let me give you some numbers on that before we talk to our guest today

[00:02:17] [SPEAKER_02]: So for the UK, if we go from January 2020 to 2024

[00:02:21] [SPEAKER_02]: Inflation over that period, cumulative is 21%

[00:02:24] [SPEAKER_02]: So prices have gone up almost a quarter basically over the last four years

[00:02:28] [SPEAKER_02]: Wages have gone up 23%, so ever so slightly more

[00:02:32] [SPEAKER_02]: Corporate profits, 53%

[00:02:35] [SPEAKER_02]: Which is why, and you can see those numbers just about anywhere else in the world

[00:02:40] [SPEAKER_02]: They are staggeringly similar actually

[00:02:42] [SPEAKER_02]: And you can see why the prices in the share market have also been increasing as well

[00:02:49] [SPEAKER_02]: You'd be thinking, hang on, if inflation is high, interest rates are so high

[00:02:53] [SPEAKER_02]: How come companies aren't getting squeezed for margins

[00:02:56] [SPEAKER_02]: And how come they're making bigger profits?

[00:02:58] [SPEAKER_02]: Because they're charging more and they're not putting it back

[00:03:00] [SPEAKER_02]: Has Kamala Harris got a point that this is part of the problem?

[00:03:03] [SPEAKER_03]: Yeah, but what she's talking about is the way in which governments can operate things

[00:03:06] [SPEAKER_03]: And the whole point of central banks in most places is they have a kind of independence

[00:03:10] [SPEAKER_03]: At least in theory they can operate outside political control

[00:03:14] [SPEAKER_03]: And that's a relatively new phenomenon

[00:03:16] [SPEAKER_03]: Was it here in the UK really from the Blair government, wasn't it?

[00:03:20] [SPEAKER_03]: Yeah

[00:03:20] [SPEAKER_03]: In the end of the 90s

[00:03:21] [SPEAKER_03]: And that means that the government control isn't there

[00:03:26] [SPEAKER_03]: So to what extent is having independent central banks actually the answer?

[00:03:30] [SPEAKER_03]: It gives confidence maybe, but they can't coordinate policy

[00:03:33] [SPEAKER_02]: Yeah, exactly, and then that big question about

[00:03:36] [SPEAKER_02]: Well should you do a little less monetary policy and a little bit more fiscal policy

[00:03:40] [SPEAKER_02]: Which is the government's responsibility

[00:03:41] [SPEAKER_02]: So should the government be spending a bit more here and there

[00:03:44] [SPEAKER_02]: To try and keep the economy on an even heel rather than the central bank

[00:03:48] [SPEAKER_02]: Could one start to blame the other?

[00:03:51] [SPEAKER_02]: Is it easily a good system working that way?

[00:03:53] [SPEAKER_02]: And do they sometimes? I think they do

[00:03:55] [SPEAKER_02]: You'll find that governments might say, for example

[00:03:57] [SPEAKER_02]: Well okay we're going to help out people

[00:03:59] [SPEAKER_02]: We're going to provide subsidies

[00:04:02] [SPEAKER_02]: Which could create more inflation potentially

[00:04:04] [SPEAKER_02]: I mean imagine if you say

[00:04:05] [SPEAKER_02]: Well okay let's subsidise an electricity company

[00:04:08] [SPEAKER_02]: Because not the company directly

[00:04:10] [SPEAKER_02]: But let's subsidise electricity consumers

[00:04:12] [SPEAKER_02]: Because the electricity company is pushing prices up so much

[00:04:16] [SPEAKER_02]: When the moment the government steps in and says

[00:04:18] [SPEAKER_02]: Well okay we'll help pay that bill

[00:04:19] [SPEAKER_02]: Then the electricity company is going to say

[00:04:20] [SPEAKER_02]: Well you beauty said, well put it up even more if you're going to pay for everyone

[00:04:23] [SPEAKER_03]: Exactly, so the money that comes from the taxes goes into the pockets of the electricity companies

[00:04:27] [SPEAKER_03]: By that situation, yeah

[00:04:28] [SPEAKER_03]: And then they pay tax because they're taxed heavily by the government

[00:04:31] [SPEAKER_02]: Yeah

[00:04:32] [SPEAKER_02]: And it all comes round again

[00:04:32] [SPEAKER_02]: And then the central bank says

[00:04:33] [SPEAKER_02]: Well hang on a second we've got all this electricity price inflation

[00:04:36] [SPEAKER_02]: We better push interest rates up

[00:04:37] [SPEAKER_02]: So not only now are people getting subsidised by the government

[00:04:40] [SPEAKER_02]: To pay their electricity bills

[00:04:41] [SPEAKER_02]: But also now they've got a much higher mortgage to pay for

[00:04:44] [SPEAKER_02]: Because of that inflation which might have been caused by government subsidies

[00:04:47] [SPEAKER_03]: But what about even having an interest rate set by the central bank

[00:04:51] [SPEAKER_03]: Why don't we just have free flowing interest rates

[00:04:54] [SPEAKER_03]: People can charge

[00:04:54] [SPEAKER_02]: Or flat interest rates

[00:04:56] [SPEAKER_02]: That's the other short

[00:04:57] [SPEAKER_02]: That's an interesting question as well

[00:04:58] [SPEAKER_02]: So there's lots of questions around this

[00:04:59] [SPEAKER_02]: What would happen if you had flat interest rates

[00:05:01] [SPEAKER_02]: I mean maybe that's our first question

[00:05:03] [SPEAKER_03]: Well let's put our questions to that guest

[00:05:05] [SPEAKER_03]: And that guest is Dominic Kadik

[00:05:07] [SPEAKER_03]: Economist at the New Economics Foundation joins us now

[00:05:10] [SPEAKER_02]: Well yeah so Dominic let's ask that question

[00:05:11] [SPEAKER_02]: What would happen if interest rates were just kept flat

[00:05:14] [SPEAKER_02]: If, pick a percentage

[00:05:16] [SPEAKER_02]: If every central bank said

[00:05:18] [SPEAKER_02]: Interest rates are 2% we're not going to move them

[00:05:20] [SPEAKER_02]: What would happen?

[00:05:21] [SPEAKER_01]: I mean it's a good question

[00:05:23] [SPEAKER_01]: The actually most honest answer is I don't know

[00:05:25] [SPEAKER_01]: And I think any economist that answers with more certainty is lying

[00:05:29] [SPEAKER_02]: But most economists would actually say

[00:05:31] [SPEAKER_02]: Well we'd get rampant

[00:05:32] [SPEAKER_02]: You know you would have no defence against rampant inflation

[00:05:35] [SPEAKER_02]: Would be their answer wouldn't it?

[00:05:36] [SPEAKER_01]: Yeah but I think about

[00:05:37] [SPEAKER_01]: You know what we experience from 2008 to the 2020s

[00:05:44] [SPEAKER_01]: The pandemic right?

[00:05:46] [SPEAKER_01]: Interest rates were at like a 0%

[00:05:50] [SPEAKER_01]: Or even negative

[00:05:52] [SPEAKER_01]: Very very low amount for about 10 years

[00:05:55] [SPEAKER_01]: And during those 10 years we didn't see you know

[00:05:59] [SPEAKER_01]: Inflation start to skyrocket or things go out of control

[00:06:02] [SPEAKER_01]: So there's obviously you know some sort of economic context

[00:06:06] [SPEAKER_01]: To consider that

[00:06:08] [SPEAKER_01]: But then the question is like

[00:06:10] [SPEAKER_01]: What if they were kept at that level

[00:06:12] [SPEAKER_01]: Once we started to see the inflation that came out of the pandemic

[00:06:16] [SPEAKER_01]: Which then becomes like the more interesting question

[00:06:19] [SPEAKER_01]: But just you know it depends on the time scale as well right?

[00:06:23] [SPEAKER_01]: We have had 10 years where interest rates have been that low for that long

[00:06:26] [SPEAKER_01]: And nothing really happened

[00:06:28] [SPEAKER_03]: Isn't it a question of certainty really?

[00:06:29] [SPEAKER_03]: I mean if everyone knew there was a flat rate that's it

[00:06:31] [SPEAKER_03]: We've been told it's not going to move whatever happens

[00:06:34] [SPEAKER_03]: Then that would have its own impact

[00:06:35] [SPEAKER_03]: Whereas as you've heard that period you were talking 2008

[00:06:38] [SPEAKER_03]: Yes they were very low

[00:06:39] [SPEAKER_03]: But to be honest we didn't know at any given moment necessarily

[00:06:42] [SPEAKER_03]: When they might suddenly be raised

[00:06:44] [SPEAKER_03]: And what would happen as a result

[00:06:45] [SPEAKER_03]: So people had to calculate or build that uncertainty

[00:06:48] [SPEAKER_03]: And if it was absolutely announced as a kind of international fixed thing

[00:06:52] [SPEAKER_03]: There will be you know I don't know 5%

[00:06:54] [SPEAKER_03]: That's it

[00:06:55] [SPEAKER_03]: That would give people certainty on which they could then plan

[00:06:57] [SPEAKER_01]: Yeah and I think that certainty would be useful

[00:07:00] [SPEAKER_01]: But then exactly you know the reasons that we have monetary policy in the first case

[00:07:05] [SPEAKER_01]: If there came to be you know for example people were using that certainty

[00:07:09] [SPEAKER_01]: That was adding lots of demand to the economy

[00:07:12] [SPEAKER_01]: That was rising prices

[00:07:13] [SPEAKER_01]: And prices were rising to levels which people started to find unacceptable

[00:07:17] [SPEAKER_01]: Or they're rising too fast

[00:07:19] [SPEAKER_01]: Then if there was going to be like no interest rate response

[00:07:23] [SPEAKER_01]: Where you know interest rates are supposed to sort of cool that demand down

[00:07:27] [SPEAKER_01]: Then that sort of dynamic might just continue on and on

[00:07:33] [SPEAKER_01]: And get out of control

[00:07:33] [SPEAKER_01]: I think you know there's very

[00:07:36] [SPEAKER_01]: You know central bankers love to talk about like a wage price spiral right

[00:07:39] [SPEAKER_01]: Where you know workers demand higher wages

[00:07:43] [SPEAKER_01]: Those wages are used to buy more things

[00:07:46] [SPEAKER_01]: Those things rise in price

[00:07:48] [SPEAKER_01]: Then people want higher wages to buy more expensive things etc etc etc

[00:07:52] [SPEAKER_02]: Now do they think that is always the case

[00:07:54] [SPEAKER_02]: Do they think inflation is always the result of a wage price spiral?

[00:07:58] [SPEAKER_01]: Well I think based on some of their communications

[00:08:01] [SPEAKER_01]: You'd be naive to not think they think that in some ways

[00:08:04] [SPEAKER_01]: Like a lot of the time they talk about you know

[00:08:07] [SPEAKER_01]: They put up interest rates because they want to get you know

[00:08:10] [SPEAKER_01]: Rid of this wage price spiral

[00:08:12] [SPEAKER_01]: Whether it always happens is you know the more interesting question

[00:08:16] [SPEAKER_01]: And whether it even happened more recently is yeah pretty indeterminate

[00:08:22] [SPEAKER_02]: Yeah and well look because here's some interesting figures

[00:08:25] [SPEAKER_02]: By the way I used artificial intelligence to get this so it's possibly wrong

[00:08:29] [SPEAKER_02]: But I said from January 2020 to January 2024 for the UK

[00:08:34] [SPEAKER_02]: How much has inflation risen by as an aggregate?

[00:08:37] [SPEAKER_02]: How much have wages increased by and how much have corporate profits increased by?

[00:08:40] [SPEAKER_02]: So it came back and said well inflation has risen by 21%

[00:08:43] [SPEAKER_02]: Wages have risen by 23%

[00:08:44] [SPEAKER_02]: So that was sort of like help the central bank argument that

[00:08:46] [SPEAKER_02]: Well maybe wages have been pushing inflation

[00:08:50] [SPEAKER_02]: But Kamala Harris will like this one

[00:08:51] [SPEAKER_02]: Corporate profits up 53%

[00:08:55] [SPEAKER_02]: So actually you know the argument and you know a lot of people say

[00:08:58] [SPEAKER_02]: No it's definitely not profiteering by companies that's been creating inflation

[00:09:02] [SPEAKER_02]: But if you look at those numbers and then you look at the

[00:09:04] [SPEAKER_02]: You know the way share markets around the world have been behaving

[00:09:06] [SPEAKER_02]: You'd be thinking well corporate profits are increasing more than wages are increasing

[00:09:11] [SPEAKER_02]: So where's that extra money going to?

[00:09:12] [SPEAKER_02]: It's going to the companies that are providing record earnings

[00:09:15] [SPEAKER_02]: Isn't it? And isn't that a big part of the inflation problem?

[00:09:19] [SPEAKER_01]: Yeah I think so and I think one of the best

[00:09:23] [SPEAKER_01]: Most prominent speakers on this is Isabel Weber right?

[00:09:26] [SPEAKER_01]: And she's talked about how

[00:09:28] [SPEAKER_01]: Because I think you know a lot of people tried to mischaracterise her view as like this whole idea of greedflation

[00:09:35] [SPEAKER_01]: And I think some people would interpret that as like

[00:09:38] [SPEAKER_01]: As a response to higher prices lots of firms became more greedy

[00:09:42] [SPEAKER_01]: It was actually much more a description of just how you know

[00:09:46] [SPEAKER_01]: Capitalism works at the end of the day that it wasn't companies becoming more greedy

[00:09:50] [SPEAKER_01]: It was companies gaining market power

[00:09:53] [SPEAKER_01]: Due to the sort of like supply side problems that were present

[00:09:56] [SPEAKER_01]: That were causing prices to rise

[00:09:58] [SPEAKER_01]: And through that higher market power

[00:10:02] [SPEAKER_01]: Using that to have higher markups on their

[00:10:05] [SPEAKER_01]: The price of their goods and higher profits right?

[00:10:08] [SPEAKER_01]: And I think you know that's pretty interesting in and of itself

[00:10:12] [SPEAKER_02]: Is that because they've got less competition now?

[00:10:14] [SPEAKER_02]: So if you look at supermarket shelves there's less of a range

[00:10:17] [SPEAKER_02]: I know it's not all retail goods you know it's much broader than that

[00:10:20] [SPEAKER_02]: But if you look on supermarket shelves there's a much lesser range of goods that are available now

[00:10:24] [SPEAKER_02]: Less choices in brands

[00:10:26] [SPEAKER_02]: So has there been sort of a concentration and is that part of what you're talking about

[00:10:30] [SPEAKER_02]: Where if you've got less competition obviously you can push your prices up

[00:10:33] [SPEAKER_01]: Yeah exactly and I think yeah that's what I meant by having more market power

[00:10:36] [SPEAKER_01]: I think maybe a good way to also think about is that you have you know the big supermarkets like Tesco, Saint-Gerty, Morrison's

[00:10:44] [SPEAKER_01]: They as part of their sort of smart planning

[00:10:47] [SPEAKER_01]: They often will you know have contracts with suppliers that you know guarantee them products in a year's time right?

[00:10:56] [SPEAKER_01]: Whereas you know your local corner shop will be sort of buying them as they go when they run out of stock and etc

[00:11:02] [SPEAKER_01]: And what that means is when there is like a supply side shock

[00:11:04] [SPEAKER_01]: Tesco already has this contract that says that you know their supplier has to give them you know first aid

[00:11:10] [SPEAKER_01]: And that leaves you know other smaller brands businesses actually constrained by the supply constraints

[00:11:17] [SPEAKER_01]: And then that sort of makes that market power concentrate to the people that already have more power and lets them rise prices higher

[00:11:26] [SPEAKER_02]: And 53% corporate profits in four years

[00:11:29] [SPEAKER_03]: And what we're talking about, what we're talking about in all this is the jungle that is there in capitalism

[00:11:34] [SPEAKER_03]: This is how it works people you know have power they get power in various different ways

[00:11:37] [SPEAKER_03]: Partly by being big and profitable in the first place

[00:11:41] [SPEAKER_03]: But what we want to talk about is you know is the people who set the rules if there are rules really within that system

[00:11:46] [SPEAKER_03]: The central bankers globally and then sort of the gatekeepers I don't know how one would describe them really

[00:11:52] [SPEAKER_03]: But kind of people who have some sort of control over it

[00:11:55] [SPEAKER_03]: Do you think Dominic that they are doing what they're supposed to do have done what they're supposed to do

[00:12:01] [SPEAKER_03]: And are actually doing an efficient job using these tools that they have

[00:12:05] [SPEAKER_03]: Whether it's QE or whether it's controlling interest rates or whatever it is are they working

[00:12:09] [SPEAKER_02]: Yeah did they do anything for example for that profiteering that we're talking about

[00:12:12] [SPEAKER_01]: So I probably have a controversial viewpoint here in the sense that I'm very critical of what central banks do

[00:12:19] [SPEAKER_01]: But I also think central bankers do a good job at what they do

[00:12:22] [SPEAKER_02]: So you think they're doing it really well they're just doing the wrong thing is that what you're saying

[00:12:26] [SPEAKER_01]: It comes down to how central banks have been given like the sole responsibility for inflation

[00:12:32] [SPEAKER_01]: And governments have sort of shirked the responsibility of inflation to them right

[00:12:37] [SPEAKER_01]: Because the most recent inflation we saw there's probably arguments that it's much better tackled with fiscal measures

[00:12:43] [SPEAKER_01]: But the central bank doesn't have access to or have the legal ability to implement those fiscal measures

[00:12:50] [SPEAKER_01]: And you know there's many central bankers out there who say you know we encourage governments to react with fiscal measures

[00:12:59] [SPEAKER_01]: To the sort of thing like lots of IMF economists always sort of suggest that central banks should be raising interest rates slightly

[00:13:05] [SPEAKER_01]: But really like the burden of responsibility should be on the government

[00:13:08] [SPEAKER_01]: But when you're in a situation where the government doesn't want to take any responsibility

[00:13:13] [SPEAKER_01]: You're leaving it to the central bank and therefore the central bank has to do much more legwork than it really should be doing

[00:13:20] [SPEAKER_02]: If that makes sense

[00:13:21] [SPEAKER_02]: Yeah well it does because central because governments of course don't want to spend the money

[00:13:24] [SPEAKER_02]: Because they don't want to get themselves deeper into debt

[00:13:26] [SPEAKER_02]: Particularly after what we've just been through with the amount of money they had to bail people out for

[00:13:32] [SPEAKER_02]: But how will fiscal policy work?

[00:13:34] [SPEAKER_02]: So if you let's forget about you know any constraints on how much money governments can create

[00:13:38] [SPEAKER_02]: If they could create endless money and they were trying to solve the problem that we've got with inflation through fiscal measures

[00:13:44] [SPEAKER_02]: What would they do?

[00:13:45] [SPEAKER_01]: Yes I mean it's an interesting question and I think it should always be a direct response to you know where the sources of inflation are coming from right?

[00:13:55] [SPEAKER_01]: So like you know the inflation we most recently saw was because of like Russian's invasion of Ukraine

[00:14:00] [SPEAKER_01]: And that sort of messing up energy supplies within Europe

[00:14:03] [SPEAKER_01]: Also you know pandemic supply chains sort of bottlenecks and just adjusting to sort of like a new economic system post pandemic

[00:14:12] [SPEAKER_01]: And you know if governments were able to you know protect sort of energy provisions i.e. either through providing you know more green energy sources

[00:14:22] [SPEAKER_01]: More domestic energy sources or simply through just you know subsidizing energy such that you know that cost of energy didn't change

[00:14:31] [SPEAKER_02]: They've done that of course I mean so one of those I mean we're sort of doing all of that aren't we?

[00:14:36] [SPEAKER_02]: I mean that we are looking at trying to make ourselves in the UK and I think everyone around the world is trying to say well let's get more renewable energy

[00:14:42] [SPEAKER_02]: And let's also be more reliant on domestic energy but that idea of you know helping people cover the costs

[00:14:49] [SPEAKER_02]: We've been doing that and maybe that's helped keep the cost of energy containable

[00:14:55] [SPEAKER_02]: But at the moment isn't it not that also problematic and could be inflation as well?

[00:14:59] [SPEAKER_02]: I mean the moment the government starts saying well tell you what if prices are going up so much we'll pay either you or we'll pay the company to subsidize those prices

[00:15:08] [SPEAKER_02]: So they're not quite so expensive I mean there's every reason for that company then to say well thanks very much for that we'll keep pushing our prices up then

[00:15:15] [SPEAKER_02]: I mean how do you put a cap on the top end of those prices?

[00:15:19] [SPEAKER_01]: Yeah I mean there's obviously like clear you know cases for regulation in those markets like price gouging laws can sort of prevent against that

[00:15:27] [SPEAKER_01]: I mean there's also quite a good case for sort of like nationalization of these sort of like you know basic services

[00:15:32] [SPEAKER_01]: And you know there's always like an irony of like having private provision of something that is a natural monopoly

[00:15:38] [SPEAKER_01]: Especially in this sort of crisis times where there is a supply shortage and therefore you know there is maybe a justifiable reason that the prices are rising

[00:15:47] [SPEAKER_01]: But then if you leave it to private hands they raise them by much more than is actually necessary right?

[00:15:56] [SPEAKER_02]: Because you know because they've got to get this 53% increase in corporate profits over four years so absolutely worth it

[00:16:02] [SPEAKER_03]: Hang on you know we're talking about what governments can do but let's move back towards what the central bankers do

[00:16:09] [SPEAKER_03]: I'm still intrigued by what you were saying that they are good at what they do they're just not doing the right thing

[00:16:13] [SPEAKER_03]: So what things should central bankers be able to do should they have more powers?

[00:16:20] [SPEAKER_03]: Should they have some ideas other than just using interest rates essentially a bit of QE and do a better job is that what you think?

[00:16:28] [SPEAKER_02]: Or here's a radical question similar to what you said you were sounding a bit radical before Dominic

[00:16:33] [SPEAKER_02]: Should we have central banks or should it all just be the work of the treasury?

[00:16:36] [SPEAKER_01]: So I think the sort of origins of this question right trace back to like the start of like neoliberalism in the sort of central banking sector right?

[00:16:47] [SPEAKER_01]: Because central bank independence is sometimes like the misnomer which people sort of like try to like blame issues on

[00:16:53] [SPEAKER_01]: But really I think the issue is that central banks their only tools that they've been allowed to play with for like the past 30 years

[00:17:01] [SPEAKER_01]: Are interest rates and open market operations where they're just you know making transactions in the market

[00:17:07] [SPEAKER_01]: And they're not doing anything by force they're doing everything you know consensually with private actors

[00:17:13] [SPEAKER_01]: And this is actually quite a shift change from what central banks used to be like in the past

[00:17:20] [SPEAKER_01]: So like if you look in the UK's history but also France Canada and the US all over the Western world

[00:17:26] [SPEAKER_01]: Central banks used to be much more engaged in like the direct monetary financing of government schemes

[00:17:32] [SPEAKER_01]: They used to also look at credit controls of different industries like France is a great example of this

[00:17:40] [SPEAKER_01]: Where they had different like lending limits and gave like different industries of like you know national interest

[00:17:48] [SPEAKER_01]: Access to like much lower interest rates than they could find on private markets just because they knew that those industries should be the ones that get focused on

[00:17:58] [SPEAKER_01]: So there's lots of you know in history there's been lots of things that central banks have done that they've simply not allowed to do now

[00:18:07] [SPEAKER_01]: Half because of central bank independence but much more because of how you know neoliberalism has sort of said you know you could only

[00:18:14] [SPEAKER_01]: You know market competitiveness is like the most important thing and doing things that are sort of anti-liberal in terms of you know forcing different industries to interact with the central bank in certain ways

[00:18:28] [SPEAKER_02]: Yeah it seems to be this big interventionist in it

[00:18:31] [SPEAKER_02]: Should we go back to?

[00:18:35] [SPEAKER_02]: How can you do that as an independent central bank? That's the problem because they are political decisions

[00:18:39] [SPEAKER_02]: So you could say for example well we're going to give 0% finance to any renewable energy project for example but that's a political decision to do that

[00:18:49] [SPEAKER_01]: Yeah and I think I mean because you sort of talked about earlier so you know we said that central banks are you know charging really high interest rates

[00:18:59] [SPEAKER_01]: We're not charging but paying really high interest rates and that's at a cost to the central bank right?

[00:19:05] [SPEAKER_01]: That's when they're setting interest rates high they're paying the banks that bank with the central bank money and in the UK that's costing us like about 40 billion pounds a year

[00:19:18] [SPEAKER_01]: And why that's interesting is that's now costing the treasury money because the Bank of England doesn't have enough money itself to you know fund those transactions

[00:19:30] [SPEAKER_01]: But the Bank of England is forbidden from creating money to fund those transactions and therefore the treasury has to then fund our response to inflation

[00:19:41] [SPEAKER_01]: So it's also sort of a misnomer to say like you know the reason governments don't want to be the ones to respond to inflation is because it costs money

[00:19:49] [SPEAKER_01]: But actually central banks are currently costing governments lots and lots of money

[00:19:53] [SPEAKER_01]: The only reason this is a bit controversial is that the Federal Reserve in the US and like the European Central Bank in the Eurozone

[00:20:02] [SPEAKER_01]: They actually do create the money to sort of pay these payments which sort of gets around it costing the treasury money directly

[00:20:13] [SPEAKER_01]: But the sort of you know loophole to that is they say you know we're going to create the money to create these payments

[00:20:19] [SPEAKER_01]: But instead of you getting like a remittance from the central banks the central banks you know usually send the sort of scenery money

[00:20:28] [SPEAKER_01]: The money they get from printing money the profits they get on printing money back to their treasuries

[00:20:32] [SPEAKER_01]: They're saying no we're not going to give you that anymore because we're having to create money to fund our sort of services

[00:20:40] [SPEAKER_01]: So like there is a big fiscal cost to how central banks work if it's pretty interesting

[00:20:45] [SPEAKER_02]: If the central bank is creating money to sort of fund its operations then that's new money isn't it which is going into the economy

[00:20:51] [SPEAKER_02]: And neoliberal economists would argue well you know if you create too much new money that's putting more money in circulation

[00:20:58] [SPEAKER_02]: You've got more pounds in circulation then that means you've got inflation because each pound is worth less

[00:21:03] [SPEAKER_02]: But is there actually any evidence to suggest that that is actually the case? More money creates inflation?

[00:21:07] [SPEAKER_01]: I think yeah there's a lot of ways it doesn't so like even if you're like a mainstream economist

[00:21:13] [SPEAKER_01]: The one way that they would argue against it and why they sort of you know they defend QE and stuff like that

[00:21:18] [SPEAKER_01]: I think that's the biggest reason why they're arguing against it is because it also matters if it's reversible

[00:21:21] [SPEAKER_01]: Because you know it matters how sort of like the market expects sort of money to sort of grow and wane and wax over time right?

[00:21:34] [SPEAKER_01]: And therefore if they see sort of the central bank creation of money as something that's reversible

[00:21:39] [SPEAKER_01]: Then they're going to react less you know strongly to it

[00:21:45] [SPEAKER_01]: And there's like over time it's not going to have like the same effects on inflation

[00:21:49] [SPEAKER_01]: So that's sort of like a mainstream argument of why that you know logic is not exactly true

[00:21:55] [SPEAKER_02]: Yeah because I mean yeah because if more money creates inflation therefore taking money away would therefore presumably reduce inflation

[00:22:01] [SPEAKER_02]: But you know it's funny whenever I talk to my mum you know she's just coming out for 90 now

[00:22:06] [SPEAKER_02]: And ask her you know how are you feeling about the supply of money mum? Now there's more of it

[00:22:09] [SPEAKER_02]: She's never really as if

[00:22:11] [SPEAKER_03]: You get amazed at the conversations that go on in Phil's house

[00:22:13] [SPEAKER_02]: She doesn't survive around very often but it's actually doesn't it's strange enough doesn't have a clue

[00:22:18] [SPEAKER_02]: Whether there's more money in circulation or there's less than therefore whether it's inflationary or not

[00:22:22] [SPEAKER_03]: I have to say you lost me about three sentences ago or perhaps

[00:22:26] [SPEAKER_03]: Just those three sentences yeah

[00:22:27] [SPEAKER_03]: Well I know Phil is keeping up with you I'm rather less aware of this

[00:22:31] [SPEAKER_03]: I take on board the general point that you're making about the way in which money can be generated and potentially isn't necessarily inflationary

[00:22:38] [SPEAKER_03]: But overall you know we're talking about the what central banks currently can do and in fact do as we know

[00:22:46] [SPEAKER_03]: But have they are they behaving in ways of them I mean we know that they coordinate to some extent right across the piece

[00:22:53] [SPEAKER_03]: You know that they have these meetings based at Jackson Hole and they talk about these things

[00:22:57] [SPEAKER_03]: Is there an argument for a much greater level of coordination amongst central banks perhaps less

[00:23:05] [SPEAKER_03]: There's a variation in where they do these things not the flat interest rates we were talking about earlier necessarily

[00:23:09] [SPEAKER_03]: But just a greater theme if you like that they all work on together

[00:23:12] [SPEAKER_03]: Well they sort of do don't they

[00:23:14] [SPEAKER_03]: Well do they

[00:23:15] [SPEAKER_02]: Well I mean that's why they get together at Jackson Hole

[00:23:17] [SPEAKER_03]: Well and yet you see such variations and disputes with it

[00:23:20] [SPEAKER_02]: Well I mean you tell us Dominic but isn't it I mean it's almost like the Fed leads the way isn't it

[00:23:25] [SPEAKER_02]: You know it's like you can't have a huge variation in interest rates between Europe and Australia and you know the

[00:23:32] [SPEAKER_02]: And the United States because if those if some countries fall way behind what the Fed's doing then it has impacts on

[00:23:40] [SPEAKER_02]: For example currency exchange rates and that sort of thing

[00:23:43] [SPEAKER_01]: Yeah exactly I mean that's what I was going to say as well but I guess also to like illustrate is that

[00:23:48] [SPEAKER_01]: You know if the Fed's giving a higher interest rate than the Bank of England what's stopping you know a bank like HSBC

[00:23:55] [SPEAKER_01]: Which you know probably has an account at the Fed and the Bank of England from just moving their money to the Fed where they get a higher interest rate

[00:24:01] [SPEAKER_02]: Right and that's like the that's like the the great extreme example of that is the Japanese carry trade isn't it

[00:24:06] [SPEAKER_02]: So people have been borrowing money in Japanese in yen because the interest rates been so low

[00:24:11] [SPEAKER_02]: And they took it elsewhere

[00:24:12] [SPEAKER_02]: Taking it elsewhere and getting a higher interest rate

[00:24:13] [SPEAKER_03]: But that's a huge distortion in the global economy effectively and caused immense problems just what was a couple of weeks ago

[00:24:18] [SPEAKER_03]: Isn't that an argument for having a much more coordinated system

[00:24:21] [SPEAKER_01]: Yeah I mean I think it is and if you think of a central bank as the bank of you know commercial banks in a country

[00:24:28] [SPEAKER_01]: Well there should be a step up from that where you have a central bank for central banks right

[00:24:32] [SPEAKER_01]: But we actually don't necessarily have that other than sort of like kind of through the IMF and like the World Bank and etc

[00:24:39] [SPEAKER_01]: But it's interesting that that sort of process is not formalized in the global economy because it does seem like a bit of a missing link

[00:24:46] [SPEAKER_03]: Well it sounds a bit one world governmentish doesn't it

[00:24:48] [SPEAKER_03]: It does but you can see advantages to it I mean you're saying it effectively exists already

[00:24:52] [SPEAKER_01]: It exists effectively but in such a sort of you know broken up way in which it doesn't really serve any overarching purpose

[00:25:01] [SPEAKER_01]: Whereas if you did have some sort of formal institution that was like that that possibly could be you know benefits to be gained

[00:25:09] [SPEAKER_02]: Yeah although you know it would become a political organization wouldn't it and no one would agree

[00:25:13] [SPEAKER_02]: Everyone would be going well okay you're gonna lower your interest rates that's gonna advantage you and you know disadvantage us

[00:25:20] [SPEAKER_03]: Why should why should we pay and you can't imagine for example the Chinese central bank coming on board with something like that

[00:25:26] [SPEAKER_03]: I mean you know we're talking about really you know Japan perhaps the UK Europe the Fed but not much wider than that

[00:25:33] [SPEAKER_02]: But is it and asking this question knowing the answer is yes

[00:25:38] [SPEAKER_02]: So I'll even turn it into a statement it's a blunt instrument isn't it monetary policy I mean it's and does it does it work for every occasion

[00:25:47] [SPEAKER_02]: So maybe it's fine when we see that wages are going up I mean basically when wages are going up central banks are saying

[00:25:53] [SPEAKER_02]: Well tell you what we'll make a few people unemployed that's our main aim so you feel the hurt

[00:25:59] [SPEAKER_02]: But of course you know the working people who probably are contributing the least to inflation

[00:26:04] [SPEAKER_02]: Particularly the poorer you get the least your influence on inflation but the more you feel the hurt from monetary policy

[00:26:10] [SPEAKER_02]: So from that point of view I mean not only is it not effective it's also pretty cruel isn't it

[00:26:16] [SPEAKER_01]: No it's totally agree and I mean and I think this is actually why you know a lot of people are saying that central banks raising interest rates was not the right response

[00:26:26] [SPEAKER_01]: You know this time around because you know how was central banks raising interest rates supposed to resolve you know

[00:26:34] [SPEAKER_01]: At a large scale the Ukrainian conflict but you know at a smaller scale energy prices and you know supply bottlenecks

[00:26:41] [SPEAKER_01]: In some cases there's arguments that it makes it worse right because if you have you know higher interest rates in the economy

[00:26:48] [SPEAKER_01]: If businesses are struggling with you know supply gaps ideally they'd want to invest to you know in their sort of supply chains to you know relieve those pressures

[00:27:02] [SPEAKER_01]: But if the investment becomes more expensive it's just lagging that sort of progress down the line

[00:27:08] [SPEAKER_02]: Yeah we've seen much less capital investment because of that because interest rates have been so high so they can't ramp up supply

[00:27:15] [SPEAKER_02]: So that gets over the problem that the supply shortage is maintained therefore prices stay higher

[00:27:21] [SPEAKER_02]: But that's not always the case is there I mean there have been cases where you know we have seen it's been the result of a wage spiral

[00:27:28] [SPEAKER_02]: Then it makes perfect sense

[00:27:30] [SPEAKER_01]: But I think it's also you know that is pretty rare at the same time so it's always on balance worth reconciling

[00:27:39] [SPEAKER_01]: Even if there was a wage price spiral going on like when do you intervene right because in some ways a wage price spiral in the UK wouldn't actually be that bad

[00:27:47] [SPEAKER_01]: If it was actually leading to a rise in real wages for some people right because what we've had for like you know the past 10 years is just like barely any wage growth

[00:27:56] [SPEAKER_01]: It's like why would you want to intervene when people are finally seeing their wages rising right

[00:28:04] [SPEAKER_01]: So it's like in some ways you might even want inflation to be a bit higher for a bit longer just like allow that sort of natural process to resolve it

[00:28:16] [SPEAKER_02]: It's kickstarting Japan isn't it the fact they've got inflation now means actually that wages can go up

[00:28:22] [SPEAKER_02]: And companies are saying well now actually we can push our prices up because there's been such a pressure on keeping prices down

[00:28:28] [SPEAKER_02]: They can actually make their money

[00:28:29] [SPEAKER_03]: Is it a case for saying actually the rules need to change you know what the head of the Bank of England needs to send a letter every time the inflation goes above whatever 2%

[00:28:36] [SPEAKER_03]: You know that actually this is much too tight much too fixed much too strict and then actually a lot more you know there should be a lot wider play room in that

[00:28:43] [SPEAKER_02]: Or do they get more or do they have more tools at their disposal or do we say you know the independence of central banks is too limiting

[00:28:53] [SPEAKER_02]: And let's just make the government responsible for all of it and bring them back under the control of the Treasury

[00:29:00] [SPEAKER_01]: I think for me it's like a question of like you know how much fiscal monetary coordination is there so like how much are governments and central banks talking to each other

[00:29:10] [SPEAKER_01]: And could you know the government ever have the power to sort of slap the central bank on the wrist and say you know hold back on responding to inflation now because it's actually leading to you know wage grave

[00:29:20] [SPEAKER_01]: And I think at the same time that sort of conversation should always be you know contextual because the sort of supply side inflation we've just seen letting that go unchecked wouldn't necessarily be the best idea

[00:29:33] [SPEAKER_01]: But it should have been checked with you know fiscal policy right whereas if we were to see some sort of demand side policy right where people's wages are rising maybe we would allow that to go unchecked for a bit and then say yeah now's the time the central bank should be responding

[00:29:48] [SPEAKER_01]: Now that people's wages have risen you know to an appropriate level

[00:29:53] [SPEAKER_03]: Well so don't I raise we sort of draw this to a conclusion just get a sense from you do you think as we sit that central banks have the right powers the wrong powers

[00:30:03] [SPEAKER_03]: You know you've already said you think they're doing a good job so should they be independent should they not be independent what's your view as to where

[00:30:10] [SPEAKER_01]: I think they're doing a good job of the wrong tools which actually means a bad job right so I think they need you know an expanded toolkit but they need to be empowered to have that toolkit right and and to have that toolkit they need the sort of permission of

[00:30:24] [SPEAKER_01]: Governments to allow them to do those sort of interventions that we mentioned earlier like get you know offering lower interest rates to areas of the economy that are strategically useful or could actually resolve inflationary pressures

[00:30:38] [SPEAKER_01]: They should you know be able to monetary finance things when they think that is appropriate right there's lots of them you know arguments that

[00:30:48] [SPEAKER_01]: QE was like you know some form of monetary financing but if you had a more direct sort of QE that went directly to people rather than you know big banks and like pension funds that that could have had you know much more beneficial effects to the economy and also cost central banks and governments much less in the long term

[00:31:05] [SPEAKER_01]: So like there's lots of arguments that you know the tools that central banks are using are just not the right ones I kind of say it's like they're a surgeon that's using like a shovel but they're you know and they're doing their best job with that shovel

[00:31:22] [SPEAKER_02]: By banging the baton over their head. So more fine tuning would be possible. But do they have the expertise do they have the and is it easy you know is the data available for example to make those right decisions because what you're talking about is almost like a bit of a sectoral approach to the economy isn't it?

[00:31:45] [SPEAKER_02]: I mean we're trying to understand you know where the growth opportunities lie where the inflation is actually happening. I mean we have enough difficulty as it is just trying to get an accurate picture of what the aggregate inflation level is like so to try and break any of this down to levels where it's going to be able to fine tune a policy particularly given the lag effects you know you might make a change tweak here and there and it can take six months or a year before it has the impact. It would be a difficult job wouldn't it?

[00:32:09] [SPEAKER_01]: Yeah I think that's also why there needs to be that you know democratic element to it right like the heuristic for saying you know how do we know which sectors of the economies are the best to intervene in are also can be determined through you know democracy right. If a political party wins with a platform that says we need to be investing in the green industries then they should be empowered to do that and the central banks shouldn't be a blocker to it and at the moment it is.

[00:32:38] [SPEAKER_01]: So I think you know there's a lot of arguments that central bank independents you know they can be independent but they don't have to be anti-democratic and I think there is you know.

[00:32:52] [SPEAKER_02]: But it's political. We're talking about politics. I do wonder why we don't just say it's part of the treasury. Interesting experiment this independence but it doesn't really work.

[00:33:01] [SPEAKER_03]: It gives confidence perhaps in the markets they just think that you know this is something that's going to respond not for cheap political gain.

[00:33:08] [SPEAKER_03]: Yeah perhaps.

[00:33:10] [SPEAKER_03]: Well we'll see. Thanks very much Dominic. It's an interesting discussion and you know the idea that I think you know the idea that they are the surgeons, the right sort of surgeons but you know they've got the wrong scalp.

[00:33:21] [SPEAKER_02]: Well they might not be the right surgeons either.

[00:33:23] [SPEAKER_02]: Well that's another argument.

[00:33:25] [SPEAKER_02]: But anyway yeah more of a more of a surgery than a dig in a ditch. Absolutely. Good story Dominic. Thanks for coming on.

[00:33:32] [SPEAKER_02]: Thanks.

[00:33:33] [SPEAKER_02]: Of course the fact that we are doing a little bit better it seems that coming out of the inflation problem and our economy is starting to pick up again more than is happening in Europe is obviously being used as a reason for well look see we did the right thing getting out of Europe.

[00:33:46] [SPEAKER_02]: Look how badly the European economy is doing. Aren't we glad we're not part of that.

[00:33:50] [SPEAKER_02]: Well that's because we're dragged down by one particular economy which is Germany which is having a rough old time.

[00:33:55] [SPEAKER_03]: We're having a rough old time because of the situation with China by and large which is a major export.

[00:33:59] [SPEAKER_03]: Everything is connected but the question is to what extent is the relationship between the UK and Europe getting back on something a bit easier something a bit more constructive and how far is it going because the government certainly seems to be wanting to get a lot closer.

[00:34:13] [SPEAKER_02]: And there was this talk wasn't there in the press it was never sort of like validated by the government that maybe we'd have free movement for people under 30.

[00:34:19] [SPEAKER_03]: Yeah it's still in play I think they're saying I know plans at the moment but maybe it will.

[00:34:24] [SPEAKER_02]: But that is sort of like going back to his like saying well OK those people who didn't want free movement all those old people you can't have it.

[00:34:30] [SPEAKER_02]: Young people who wanted free movement well let's let's let you have it.

[00:34:34] [SPEAKER_03]: Which is not a bad thing when you think about it.

[00:34:36] [SPEAKER_03]: But the idea everyone's happy.

[00:34:37] [SPEAKER_03]: Yeah well not everyone but what is it there a moment where we can get back closer to Europe because for a while the whole idea of any kind of close relationship single market or anything like that.

[00:34:49] [SPEAKER_03]: Absolutely nothing like as far as the labor was concerned this was you know a terrible issue to have in the election.

[00:34:54] [SPEAKER_03]: Did them no good at all.

[00:34:55] [SPEAKER_03]: But if now they've got a whacking majority.

[00:34:59] [SPEAKER_03]: They're saying actually that 60 60 plus percent people would actually rather be back in the EU.

[00:35:06] [SPEAKER_03]: The time is right.

[00:35:07] [SPEAKER_02]: Is it the moment where he doesn't have to go we can't do that and say well actually we could get a lot closer.

[00:35:11] [SPEAKER_02]: Well do you know what I mean the only downside is they'll have bad things said about them on GB News but as nobody is watching that that's the election we've tested out what that does.

[00:35:20] [SPEAKER_03]: Yeah which isn't in the end that much yes you know there are five reform MPs or four or whatever many there is we would be livid of this idea.

[00:35:26] [SPEAKER_03]: Obviously stands stands against the Tories but then the total of all that isn't the vast amount.

[00:35:32] [SPEAKER_02]: Yeah exactly.

[00:35:33] [SPEAKER_02]: So yeah maybe for once we could go with what the majority wants this interesting idea.

[00:35:36] [SPEAKER_02]: Yeah as I thought so look well look at that the Internet.

[00:35:38] [SPEAKER_02]: I mean there's going to be some downsides as well but we'll explore it all as we always do from every angle next week on the Y Kev join us for that me and Roger.

[00:35:46] [SPEAKER_02]: Thanks for listening today.

[00:35:47] [SPEAKER_02]: See you then.

[00:35:47] [SPEAKER_00]: Bye.