Central banks have the future of humanity in their hands: they must not fail on inflation | Yanis Varoufakis


IInflation is a disease that disproportionately affects the poor. Even before Vladimir Putin unleashed his brutal war on Ukraine, the by-products of which include soaring energy and food prices, inflation was already above 7.5% in the United States and above 5% in Europe and the United Kingdom. Calls for its taming are therefore fully justified.and rising interest rates in the US, with the same expected in the UK, come as no surprise. That said, we know from history that the cure for inflation tends to devastate the poor even more. The new problem we face today is that the so-called solutions not only threaten to deal another cruel blow to the disadvantaged, but also, worryingly, to stifle the green transition we so desperately need.

Two influential camps dominate public discourse on inflation and what to do about it. One camp is calling for the inflationary flames to be snuffed out immediately by the monetary policy version of shock and fear: raising interest rates sharply to stifle spending. They warn that delaying monetary violence a bit now will only require “Volcker shock” levels of brutality later – a reference to Paul Volcker, the Federal Reserve Chairman who suppressed the hyperinflation of the 1970s with rates exorbitant interest rates that have marked the American working class. nowadays. The second camp protests that it is not necessary, counter-proposing a stable position as long as it moves forward as long as wage inflation is kept on a leash.

Both camps agree that the increase in wages are the real threat, their disagreement centering only on whether it is safe to act before or after they begin to resume. They also agree that, to fight inflation, the supply of money and credit must be handled in two stages: central banks must first stop creating new money and only then raise interest rates . Both sides are dangerously wrong on both counts. First, wage inflation should be welcomed, not treated as public enemy number one. Second, it is precisely when interest rates rise that central banks must continue to create money. Except this time, they should put it at the service of green investments and social protection.

Since 2008, inequalities have been allowed to increase. A dozen years of central bank support for the wealthy, coupled with punitive austerity for the many, has led to chronic underinvestment and low wages. Central banks ferociously ripped up the money tree to drive up stock and house prices, while wages languished. Asset price inflation and mind-numbing inequality have thus become the order of the day. Eventually almost everyone agreed, including many mega-rich, that wages had to rise not only in the interests of workers, but also because low wages underpin underinvestment and create societies bristling with low productivity, low skills, low prospects and poisonous policies.

Remarkably, it was enough for this consensus to fade away from modest wage inflation, by historical standards, caused by a post-lockdown labor shortage. After a decade of turning a blind eye to runaway asset price inflation (and even celebrating it, in the case of runaway house prices and turbulent stock markets), a whirlwind of wage inflation plunged the authorities in an almost uncontrollable panic. Suddenly, the prospect of higher wages has turned from a goal to a threat – prompting Andrew Bailey, the Governor of the Bank of England, to ask workers to submit their wage demands to a “pretty clear cut”.

But this is not a repeat of the 1970s, when the working class was the sole victim of rising interest rates. What is radically different is that today, a Volcker shock could well stifle the green transition as well as much of the labor share of national income.

The counter-argument is, of course, that neither workers nor society’s ability to invest in the green transition will benefit from wage increases outpaced by rising prices. True. What is also true, however, is that a monetary policy that prioritizes the prevention of wage inflation, even if it succeeds in nipping inflation in the bud, will only lead to a another lost decade marked by underinvestment in people and nature. While the working classes may rise up in 10 years to claim the share of global income they deserve, it is arguable that another 10 years of underinvestment in the green transition will push us all to the brink, if not extinction, irreparable damage. to the prospects of humanity.

So how to deal with inflation without jeopardizing investment in the green transition? What is the alternative to class warfare in the form of brutal interest rate policy that compresses the money supply at all levels, either violently (as shock and awe proponents propose) , or more gently (the suggestion of stability)?

A decent alternative policy must have three objectives: first, to suppress asset prices (such as real estate and stock prices) in order to prevent scarce financial resources from being wasted building up paper securities. Second, lower the prices of basic goods while allowing higher returns on investments in green energy and transport. Third, make massive investments in energy conservation and green energy, transport, agriculture – as well as social housing and care. The following three-pronged action program can achieve all three of these goals.

First, dramatically raise interest rates. Extremely low interest rates failed to stimulate investment – and, in any case, were never available to those who needed to borrow money or wanted to borrow to do things. that the company needed. All ultra-low rates have done is drive up house prices, stock prices, inequality and all those things that divide society.

But, second, it must be done in concert with a massive green public investment campaign backed by the central bank. Naturally, rising interest rates will not stimulate investment, although it is true that interest rates close to zero have not helped investment either. To escape the quagmire of weak investment, the central bank should announce a new kind of quantitative easing: it should stop financing financiers and, instead, promise to support (by buying, if necessary) public green bonds that raise funds for up to 5% of annual national income – a sum that will be invested directly in the green transition, giving society a chance to do what it must to stabilize the climate.

Third, extend the same model of public financing (ie getting the central bank to vouch for public bonds) to invest in social housing and care.

In short, what I am proposing is a reversal of the toxic policies that have been in place since 2008. Instead of central banks providing free money and low interest rates for the rich, while others languish in the prison of austerity, the central bank should make money more expensive for the rich (through significant interest rate hikes) while providing cheap money to invest in things the majority and lived environment both need and deserve.


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