Mark Carney’s grand experiment began today

I was grateful to the BBC World at One programme for giving me the opportunity today to comment on Mark Carney’s first Inflation Report. You can listen to what I said here.

The essence of what the Bank has announced is well known: they have begun using forward guidance to anchor both inflation and interest rate expectations as a cover for more active monetary policy.

This will usher in a new age of monetary Kremlinology.

The policy is all about the Committee’s intentions and judgments. It’s hedged about with provisos and escape routes. Journalists were quick to ask who thought what on the Committee, spotting that which thresholds are used and which judgments are made is dependent on the opinions of a few wise men.

If you read Mark Carney’s speech to the U.S. Monetary Policy Forum in New York last year, it is clear what he intends. Mark Carney apparently understands the critique of the Austrian School, but he believes it is “a counsel of despair for current problems” so he proposes to prevent the disruption easy money creates using “broader macroprudential management”.

Today’s announcement includes,

The  guidance will remain in place only if, in the MPC’s view, CPI inflation 18 to 24 months  ahead is more likely than not to be below 2.5%, medium-term inflation expectations remain  sufficiently well anchored, and the FPC has not judged that the stance of monetary policy poses a significant threat to financial stability that cannot otherwise be contained through the  considerable supervisory and regulatory policy tools of the various authorities.

In so far as we did not already, we now live in a world of extensive explicit discretionary power over both money and the financial system which ought to allocate real capital to the most productive uses. To believe this will end well is hubris.

Manipulating the expectations of millions of individuals, households, businesses and financial market participants will create herding on a mass scale. Like a loose load in a ship, that will result in severe instability.

Employment created through an “exceptionally stimulative monetary stance” will come to an end when that stimulation is withdrawn. In chasing its employment threshold, the Bank will paint the economy and society into a corner.

Inflation will take the Bank by surprise. The “slack in the economy”, on which the Bank is relying to avoid price inflation, will turn out to be wasted capital, not idle capital waiting to come back into use. Prices will rise.

I’m reminded of something I heard economist Steve Horwitz say, and I feel sure he will forgive and correct me if my notes are not faithful,

Central banks cannot solve the problems they created any more than an arsonist makes a good firefighter.

Unfortunately, Mark Carney is nevertheless about to conduct a grand experiment which will prove that this is so.

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27 replies on “Mark Carney’s grand experiment began today”
  1. says: Gary

    Carney says we are going to keep
    printing until unemployment
    falls. If only Robert Mugabe had
    been so lucky.


  2. says: Al Robertson

    All common sense, but it’s hard to fathom what Mr Baker finds attractive about the Conservative Party, the upper echelons of which take a wholly opposed view on monetary policy. Mr Osborne went to great expense to hire Mr Carney precisely because of the route he would take- low rates and high inflation. The problem is not so much with the BoE but with the Government.

    My local MP is a Conservative with a slim majority and insofar as I can tell is an ardent monetarist. He will likely get a well deserved boot in 2015 but until then is clearly someone the upper reaches of the Tory party think they could do with more of.

    What future is there in the Conservative Party for people like Mr Baker when they are so diametrically opposed to their party leadership? The chances of exerting any influence are ~zero, yet he will likely be tarred by the brush of Osborne’s economic madness come polling day. Brown would be proud of the Chancellor.

  3. Fiat money printing has caused massive malinvestments that WILL be liquidated at some point, either through the BofE finally regaining its senses or a crackup boom that destroys the monetary system and the structure of production along with it. As long as we have central bankers who can print money, they WILL print money…with all the terrible consequences that entails.

  4. says: Andrew Lees

    Politicians and economists have shifted emphasis to growth at all costs no matter what the damage. It is true this will create more jobs, which sounds a good thing, but because the jobs will be financed by debt rising relative to GDP, all that is happening is we are putting the balance sheet through the P&L account, and therefore eroding the real productive base of the economy. Unfortunately our leaders, whether Conservative or Labour, insist on taking us further down the road to ruin. As Kotlikoff says, these economists and central bankers are the tailors to the emperor’s new clothes.

  5. says: waramess

    The wonder of it all is that grown men can honestly believe that the government can continue to consume an ever greater proportion of production and at the same time to expect the private sector to provide sustainable growth.

    They pump up the housing market and, inevitably provide stimulus to those that provide services and materials and they call it growth. Well, lets see how long they can keep this bubble inflated. Not long I suspect and perhaps not even as long as all the other bubbles they have caused.

  6. Low grade nonsense from Steve Baker. As regards his claim that that “Employment created through” stimulatory measures “will come to an end when that stimulation is withdrawn”, history doesn’t bear that out.

    That is, governments have implemented stimulatory measures again and again for almost a century. Sometimes employment remains constant after stimulatory measures are withdraw, and sometimes it doesn’t. Who cares?

    World War II was one huge stimulatory measure. Employment didn’t collapse after that war. Whereas it did decline significantly after the First World War.

    Yawn yawn.

  7. says: Andy V

    Love your quick audio piece, although it always amuzes me how you have to be careful with your words, and not to stray into politics, by not delving into the meaning of ‘coarse aggregates’ ). Leave the Conservatives and join UKIP, until there is a massive cut in goverment spending and deregulation there can be no new growth. Perhaps you could persuade Nigel to float the policy of abolishing the bank of England /introduce competitive currencies. Its amazing to think that when Margaret Thatcher came into power inflation was 25% and the treasury was bankrupt, Cameron has move so far to the left its going to be the other way around.

  8. says: Paul Marks

    Yawn, Yawn yourself Ralph.

    You know nothing about the economics of the labour market and your are not interested in learning.

  9. says: Paul Marks

    waramess – already about half of the population (in both the United States and Britain) are on some form of government support.

    It is already too late to save the present system. The young (I am NOT one of them) should turn their minds to how they and their families can survive what is coming.

  10. says: Gary

    The employment created through the distortion of rates due to oversupplying money is misdirected investment or malinvestment. This type of investment is unsustainable, as will be revealed when the monetary stimulation is withdrawn or it collapses from a bubble. History is littered with examples.

  11. says: Gary

    my last meant as a reply to Ralph. Musgrave, an Mmt proponent who believes in a free lunch of consequence free money printing by govt.

  12. Paul Marks,

    You know nothing about the economics of the labour market and you are not interested in learning. Really smart thing to say that, wasn’t it?


    Yes I do believe there is a free lunch to be had, and it’s this. If there is excess unemployment, demand can be raised and jobs can be created for some of the unemployed by simply printing money and handing it out. Everyone is better off as a result. As long as there is a decent amount of spare capacity, that will not result in much additional inflation.

    In contrast, if there isn’t sufficient spare capacity, then the result of money printing will just be inflation.

    That little bit of theory is undeniable. As to the real world, i.e. actually gauging how much spare capacity there is and what the inflationary effect of expanding the money supply is, that’s a lot more difficult. It’s exactly that question with which central banks spend their time wrestling.

  13. says: Bruce Crichton

    Printing money is, by definition, inflation.

    To claim that it is somehow beneficial to the economy is false, no matter if this inflation of the currency is called ‘quantitative easing’.

    “That little bit of theory is undeniable”.

    It is highly deniable because it is false.

    Central banks are Marxist in nature and should not exist.

    I do not expect you to learn any rational economics but your claim that a free lunch, in the form of state intervention and printing money, is possible and desirable cannot go unchallenged.

    1. says: joe bongiovanni

      In order for ‘printing money’ to be, by definition, inflation, you need a definition of inflation.
      I use that of Von Mises on page 126 of “The Theory of Money and Credit”.
      Based on that definition, increasing the money supply, in consort with an increase in production (the need for money)
      is not inflation.
      So, do you have some other, better definition of inflation that that of Von Mises?

      1. says: Gary

        The definition of inflation is fine, the problem is the money is inflated before the production is realized. You first make the loan and deposit new money into the investor’s account and the money stays in circulation even if the new enterprise fails. We should rather have fixed supply of money that is divided down as the economy grows, that way the money supply grows without monetary inflation. That is what the gold standard is. Why don’t we have this? Must be because then the plunderers lose their ability to rig rates.

        1. says: joe bongiovanni

          Gary, thanks.

          “We should rather have fixed supply of money that is divided down as the economy grows, that way the money supply grows without monetary inflation.”

          Not sure how the money supply grows when the money supply is also fixed. Is there a relationship that is missing?

          “The definition of inflation is fine, the problem is the money is inflated before the production is realized.”

          If the definition is OK, then increasing the money supply is OK, along with production. There is a money-cost of increasing production. Whether derived from earnings or borrowing, it seems investment of that money-cost must precede an increase in production.

          Regardless of the financing source, if the production fails, the money invested remains in the economy. And, if based on full-reserve banking, the result is the same.

          “You first make the loan and deposit new money into the investor’s account and the money stays in circulation even if the new enterprise fails.”

          Again, with full-reserve banking, by making any loan, no new money is circulated into the economy – it is an investment of existing money.

          Any new money created should be to fund the consumption of the new production, so as to maintain stable prices and purchasing power.


          1. says: Gary

            Joe, the apparent paradox of a fixed money supply being able to grow by dividing it down is the essence of sound money. If an oz of gold has x value, and then the economy grows and the demand for money doubles, then the value of an oz of gold is 2x. If you divide the oz in half you now have 2 new 1/2 oz units of gold each worth x. ie you have grown the original unit with value x to 2 new units each of value x, but you still only have 1 oz of gold. No monetary inflation, but there are more monetary units in circulation.

  14. says: Steve Horwitz

    Oh it’s quite deniable Ralph. Your aggregation is the problem. It’s not a matter of making any old resource active, but one of ensuring that the pieces fit. Viewing “capital” and “labor” as undifferentiate blobs makes about as much sense as trying to cram any old pieces of a jigsaw puzzle together to form the pattern on the cover of the box.

    All you’ll get from handing out money willy-nilly is unsustainable growth.

    And I could do a whole other response on your errors about the effects of World War II, but I’ll just point you here:

  15. says: joe bongiovanni

    Just want to observe that Mark Carney’s policy initiatives might be called ‘steady on the helm’, ‘no change, really’, and we’re following the failed lead of the Fed because they’re a smidgeon ahead.

    One might expect a slightly more advanced policy leadership, given its ownership of its central bank.

    The cry of ‘mal-investment’ is well made, but its correction will primarily happen in the shadow-investment banking niche, and not in the part of the economy where the Restofus live, work and spend.

    Our economy has suffered greatly from that money-centric casino investing by the fiancialists, the result being all those idle economic resources that can only be put to useful production through a proper public investment in just such an outcome.

    What I fail to square with the present belief system is why the culprit is always he who set the low-rate parameters of the investment highway, rather than those who drove the real economy bus over a cliff.

  16. says: Michael Swaby

    I can see Al Robertson’s point. The problem is that whilst the Austrian view is now a part of the economic debate, this is not so at the mainstream political level.
    None of the main parties advocates sound money as a policy, leaving one stuck with individuals such as Steve Baker and, of course, the Cobden Centre itself.
    I note that “Bongo-Bongo Land” Godfrey Bloom is in the sound money camp. As I am not anti-European, it’s very difficult (but not totally impossible) for me to support UKIP.
    As a former Australian prime minister once said, “life is not meant to be easy”.

    1. says: Andy V

      I should hope your not “anti-European” I don’t know anyone, or any party that is anti Europe, I know a lot of people who are anti EU, but that’s it.

  17. says: Paul Marks

    Joe – quoting Mises out of context is not good.

    As you know perfectly well “inflation” meant an increase in the money supply (not the “price level” – a dubious concept in itself) it is true that the way the word “inflation” was used changed in the United States in the 1920s (under the influence of Irving Fisher), but educated Europeans still used the traditional definition. See Bruno Leoni “Freedom and the Law” (1961).

    As for your repeated failure to understand that expanding the money supply (to “maintain a stable price level”) has terrible results – I (and, I suspect, everyone else) is sick and tired of explaining the matter to you.

    Hopefully you can discuss the matter at some point with Benjamin Strong and Alan Greenspan.

    When you are all in a very warm place.

    1. says: joe bongiovanni


      I wouldn’t think that merely citing the whole page that Von Mises himself used to define ‘inflation’ in The Theory of Money and Credit would be considered quoting out of context.
      Not only because I didn’t quote anything, but also because I provided the entire context of this pretty much seminal discussion on inflation, which is his Chapter 13 on Monetary Policy.

      What I know perfectly well is that ‘some’ modern Austrians equate any increase in the money supply with the definition of “inflation”. What I don’t know is ‘why?’.

      So I go to the master who has written most about this theory, and find that his definition of ‘inflation’, as it relates to monetary policy, is remarkably similar to, though uniquely expressed, those of most monetary economists – yes, including Irving Fisher.
      I will attempt to peruse your reference.

      Finally, I thought you understood that I agreed that the expansion of the money supply, using a debt-based system of money and banking colloquially referred to as fractional-reserve banking, does in fact produce these terrible results.
      Very deep pro-cyclicality is the hallmark of debt-based money. It needs to end.

      The difference is that I know that the cause of the terrible results is the debt-based, fractional-reserve banking system. And you think it is the policy initiative of parity between production and money.

      I’m really sorry if that offends anyone.

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