“The Return of the Bogeyman”
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Dn the Lorraine and German imagination, the very good and generous Saint Nicolas, ancestor of Father Christmas, always walks accompanied by Father Fouettard, a nasty character responsible for punishing disobedient children. Central banks have the option of being either one or the other. Since the global financial crisis of 2009, they have presented us with the profile of the holy bishop, keeping borrowing rates as low as possible and buying debt with all their might to drive down the cost.
Jerome Powell, the president of the American Federal Reserve, until now conciliatory, has decided to endorse the dark costume of the bogeyman. On August 26, he promised hard times for American households. Finished the strategy of Santa Claus, which supports the economy with blows of almost free credit, which allows the States to get into debt without pain and the financiers to get rich without risk.
Why such a 180 degree turn? Because inflation is back. Disappeared from the radar screens of the economy since the advent of globalization and digital technology, it is making a remarkable comeback thanks to the health crisis. The strength of the post-lockdown recovery, with consumers and businesses protected by government largesse, has created an indefinite logistical chaos. Suddenly everything became rare and therefore more expensive, boats, trucks, raw materials, electronic chips… And men too, propelling prices and wages to the top.
Blood and tears
But inflation, the absolute evil of economies when it gets out of hand, is also a self-fulfilling phenomenon. The markets suddenly panic and start pushing prices up in anticipation of future tensions. This is what we are currently seeing on the price of gas, which is not set by Vladimir Putin but by investors. Bogeyman Powell’s first objective is to kill these destructive anticipations. And for that he promises blood and tears, which means “to cool the economy”. In other words, increase the cost of credit to lower consumption, create unemployment and thus lower prices and wages.
An unfair purge but which allows, in theory, to bounce back in healthier conditions. This is how we put the evil genie of inflation back into its bottle. Jerome Powell’s distant predecessor at the Fed, Paul Volcker, thus defeated inflation at more than 13% in 1981 by suddenly raising rates to 20%, which plunged the country into a severe recession in 1982-1983.
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