We use cookies (including third-party cookies such as Google) to remember your site preferences and to help us understand how visitors use our sites so we can improve them. To learn more, please see our privacy policy and our cookie policy.

To agree to our use of cookies, click 'Accept' or choose 'Options' to set your preferences by cookie type.

Options Accept
BullionVault

CHARTS

  • English
  • Deutsch
  • Español
  • Français
  • Italiano
  • Polski
  • 日本語
  • 简体中文
  • 繁體中文
  • Daily audit
  • Help
  • Contact
  • Deposit
  • Login
  • Open account
  • ABOUT US
    • About BullionVault
    • In the press
    • Reviews
    BUY/SELL BULLION
    • Vaulted gold & silver
    • -Live order board
    • -Daily Price
    • Coins for delivery (UK)
    INVESTMENT GUIDE
    • Guide to gold
    • -How to buy gold
    • -Gold investment
    • -Gold investment plan
    • -Investment insurance
    • -Compare asset performance
    • Guide to silver
    • -How to buy silver
    • Guide to platinum
    • -How to buy platinum
    GOLD NEWS
    • Gold news front page
    • -Gold price news
    • -Opinion & analysis
    • -Market fundamentals
    • -Gold/Silver Investor Index
    • -Infographics
    CHARTS
    • Gold price
    • Silver price
    • Platinum price
    • Price alerts
  • Login
  • Open account
  • BUY/SELL BULLION
  • Vaulted gold & silver
    • ⤷
    • Live order board
    • Daily Price
  • Coins for delivery (UK)
  • INVESTMENT GUIDE
  • Guide to gold
    • ⤷
    • How to buy gold
    • Gold investment
    • Gold investment plan
    • Investment insurance
    • Compare asset performance
  • Guide to silver
    • ⤷
    • How to buy silver
  • Guide to platinum
    • ⤷
    • How to buy platinum
  • GOLD NEWS
  • Gold news front page
    • ⤷
    • Gold price news
    • Opinion & analysis
    • Market fundamentals
    • Gold/Silver Investor Index
    • Infographics
  • CHARTS
  • Gold price
  • Silver price
  • Platinum price
  • Price alerts
  • ABOUT US
  • About BullionVault
  • In the press
  • Reviews
  • Help
  • Contact
  • Daily audit
    • English
    • Deutsch
    • Español
    • Français
    • Italiano
    • Polski
    • 日本語
    • 简体中文
    • 繁體中文

Gold News

Live support

NEED HELP? ASK US NOW

Search form

Gold News front page

Gold Price News

Silver Prices Jump as 'Reddit Crowd' Urged to Buy Precious

More...

Gold Investing In Depth

Learn about gold bullion bars

Learn about gold bullion coins (and costs)

Gold investment: Why & how?

Gold Investment Analysis

  • Latest Gold Investor Index
  • Diversification: Gold as investment insurance
  • 40-year Asset Performance Comparison Table

Gold Articles

Opinion & Analysis

Gold Price News

Investment News

Gold in History

Gold Books

Gold Investor Index

Gold Infographics

Archive

  • January 2021 (19)
  • December 2020 (24)
  • November 2020 (23)
  • October 2020 (25)
  • September 2020 (25)
More...

List of authors

My Precious Independence!

Thursday, 12/03/2020 09:01
One central bank to rule them all...
 
DO YOU ever wonder how the idea of central banks targeting 2% inflation came about? asks John Stepek at MoneyWeek magazine.
 
Of course you don't. You're a normal person. But believe it or not, it's quite an interesting story. And it's relevant right now. Because the same pioneering central bank that started it all is now thinking about changing its target.
 
These days, central banks across the developed world are technically independent. Please note, I say "technically". By that, I'm not implying that there's any conspiracy and that the central bank or its governor is simply a puppet of the government. That's not the case.
 
My point is that it's difficult to be truly independent if the same entity that granted you your independence (the government) can retract it pretty much the instant that it decides it's no longer politically convenient to have an independent central bank.
 
Anyway, getting back to the main point, we elect politicians to make decisions about the economy. We don't elect central bankers.
 
So if you're going to make a central bank independent, you need to give it a specific job to do. That's the only way that technocrats can remain accountable in a democracy.
 
But what target?
 
The primary focus of almost all central banks is to keep inflation under control (the Federal Reserve – America's central bank – also has a line in there about employment). And the figure that central banks (including our own in the UK) have mostly decided on is 2%, or a band that swings around 2%.
 
Where did that come from?
 
In 1989, politicians in New Zealand passed a law to grant their central bank independence, and they also told it to target inflation of 0%-2%.
 
At that time, New Zealand was coming out of a period of horrendous double-digit inflation. Inflation was just under 8% at the point of the law being passed – about the same level as the UK was suffering, as judged by RPI rather than CPI.
 
Yet within just over 2 years, by the end of 1991, inflation in New Zealand had dropped to 2%.
 
Wow. Mission accomplished. (Never mind that inflation was falling around the rest of the world too). Central bankers and politicians around the world took note, and before you know it, we were all copying the Kiwis.
 
The thing is, the inflation target wasn't really based on anything beyond a hunch.
 
To be fair, it makes economic sense that low-ish and stable inflation is probably a good thing. It makes it easier in general to plan ahead if you can rely on prices being broadly stable. So it wasn't exactly pulled out of the air.
 
But the point is, like almost everything else in macroeconomics, 2% inflation targeting is one of those things whose theoretical backing is very flimsy, but which assumes the solidity of Newtonian gravity by the time it's been adapted around the world.
 
I'll admit I find it funny that the nation which gave us the Lord of the Rings film trilogy also happens to be the home of the one central bank to rule them all. But I'm easily amused.
 
Anyway, you're thinking: "That's all very well, John, and it'll definitely make for a cracking anecdote for my first post-Covid dinner party – thank you very much – but why are you bringing it up now?"
 
Well, late last month, New Zealand's finance minister, Grant Robertson (their Rishi Sunak), suggested that maybe the central bank should have control of house prices added to its remit.
 
"With an extended period of low interest rates, now is the time to consider how the Reserve Bank may contribute to a stable housing market."
 
This is happening now partly because prices in New Zealand have gone wild in the last year. We think we're having a boom in the UK – it's nothing compared to theirs. New Zealand house prices are up about 20% over the past 12 months. It's a lovely place, but even so.
 
Anyway, it's an intriguing proposal. There's no doubt in my mind that the primary cause of all the political discontent of the last decade or more is high property prices. And the fundamental cause of high property prices is low interest rates. There are idiosyncrasies in each market, of course, but it's the only common factor to explain the global property price boom.
 
The trouble with high prices is that it gets ever harder for those who are starting out to buy a home. In turn, that delays starting a family and generally feeling like a "grown-up".
 
Millennials (and those who speak for them in marketing agencies) sometimes talk about embracing a "rental lifestyle" and valuing experiences over things. But this is a post-hoc rationalisation of the simple fact that they feel they can't afford to own some of the things that most of us regard as fundamental milestones in an adult life. Hence the anger.
 
So how might a central bank somehow temper property price rises? The obvious answer is to raise interest rates. Of course, that would result in a house price crash. It would also crash the rest of the economy. It's hard to buy a house, however cheap it is, if you don't have a job.
 
So the central bank would need instead to impose credit controls on mortgages. You impose lending limits (no more than three times your salary, regardless of monthly payment affordability) or you make sure that banks can't issue loans except at "base rate plus 5%" say. Is this a good idea?
 
I think housing affordability is a serious problem. But no, I don't think this is a good solution. If you hand this to the central bank, you are effectively setting an annual target for house price growth. It's a price control, really. You're adding another distortion to an already hideously distorted market. And you're taking yet another step closer towards the full nationalisation of the economy and the financial system.
 
None of it addresses the fundamental problems which are rather too far-ranging to address here right now. Not to mention the fact that as soon as price growth limits are imposed, it's hard to see how that wouldn't have an impact on the market.
 
However, as Louis Gave of Gavekal points out, this doesn't mean it won't happen. House prices are now viewed as a political problem. When inflation was a political problem, politicians punted it to the central bank. Why not do the same with house price inflation?
 
I guess we'll all just have to keep an eye on New Zealand.
  • Reddit logo
  • Facebook logo
  • Twitter logo
  • Google logo
  • Yahoo logo
  • LinkedIn logo
  • Digg logo
  • StumbleUpon logo
  • Technorati logo

Launched alongside the UK's highly popular The Week digest of global and national news in 2001, MoneyWeek magazine mixes a concise reading of the latest financial events with expert comment and investment ideas.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn

 

Mobile apps

 - live trading 24/7

 - buy & sell instantly

 - up-to-the-second charts

 

 

 

Daily news email
Go to 'communications settings' 

Get the latest daily gold price news free by email

Latest gold news by email

 

 

 

Gold Investor Index
5 January 2020

Gold Investor Index

Gold investing +58% in NY21

 

 

 

LBMA webinar
21 January 2021

LBMA

London gold trading

 

 

 

International
Investment

16 December 2020

Gold 2021

Gold in 2021

 

 

 

LBMA Alchemist
1 December 2020

Newton

True Gold/Silver Ratio

 

 

 

  •  Email us

Market Fundamentals

  • 'Cut Bullion Duty to Cut Smuggling': India's Gold Industry
  • Platinum Price Hits 4-Year High Even as Electric Beats Diesel Cars in Europe
  • Record Investing Pushes 'Industrial' Silver and Platinum into Deep Deficits
More...
  • Cost calculator
  • Cookies
  • Terms & conditions

©BullionVault Ltd 2005-

  • Twitter
  • Facebook
  • LinkedIn
  • YouTube

Save your cookie preferences

We use cookies to remember your site preferences, record your referrer and improve the performance of our site. For more information, see our cookie policy.

Please select an option below and 'Save' your preferences.

Save

You can update your cookie preferences at any time from the 'Cookies' link in the footer.

Secure auto-logout warning

You have not been active for some time.

For your security you will be logged out in   minutes unless you take action.