Forward guidance

One of the notably sinister traits of a central bank is the act of collaboration (read, collusion) between countries: they can’t exist for long without it. It is therefore not surprising that when Ben Bernanke issued a statement linking future monetary policy decisions to unemployment the new Governor of the Bank of England followed suit with what is called “forward guidance” (in English, guidance for the future). So what is it?

You can read the full thing here but in brief: the Bank Rate will be held at 0.5% and asset purchasing will continue, at the MPC’s discretion, while unemployment remains above 7%. This is subject to 1) expectations of inflation in two years time remaining within 0.5% above the 2% target 2) inflation during the next two years remaining “sufficiently anchored” 3) the Financial Policy Committee (in charge of deciding if something poses a systemic risk to the financial markets) deciding if monetary policy is too loose to contain.

As an aside, the guidance is revealing. It shows that the Bank admit that their monetary policy stokes inflation (despite all common sense, it is often disputed still that loose monetary policy causes inflation); that systemic risks are caused by central banks and not derivative-toting yuppies.

The recent policy changes by both the Fed and the Bank (and probably, maybe a few years from now, the ECB) harkens back to the nightmare inflation in the Weimar Republic. In Adam Ferguson’s very detailed description of the horrors of a collapse in fiat currency in When Money Dies, he describes how the printing press turned at an accelerating rate to keep employment up. Of course, it was unsustainable and it ended in a disastrous collapse in financial markets and the impoverishment of millions of people. (While enriching many of the ‘1%’ – sound familar?)

The only blessing found in forward guidance is that the Bank has partially limited the damage it can do, but this should not be a comfort. Linking money printing to unemployment rates ruined Germany and it will ruin us.

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