The World’s Central Banks Are No Match for the Global Economy

Writing in his newsletter last week, the great George Gilder quipped that the world’s central bankers are apparently “demoralized over their inability to drive the world into recession.” Gilder was referencing a front page Wall Street Journal story focused on the strength of the global economy, and how the latter may persuade “central bankers that they need to raise key interest rates further” to pour “cold water on an economy that is still running a little too hot.”

Books. Could. Be. Written. And they have been.

For now, all readers need to know in order to confirm the truth about the title of this write-up is to read what central bankers think to be true. They quite literally believe against all logic and empirical reality that economic growth causes prices to rise and that rising prices are inflation. They’re stupendously wrong twice about basic economics, which is why we know their power is theoretical rather than real. If individuals this clueless actually had the power to foist their obnoxious, central planning conceit on the global economy, it would be too wrecked for anyone to have the time and resources to write about.

The simple truth is that investment is the driver of economic growth despite what economists and central bankers say about consumption as the instigator. And the purpose of investment is to produce more and more goods and services with fewer and fewer “hands.” Translated, the surest sign of a growing economy is falling prices. Basic stuff.

Inflation? That’s a decline in the unit of measure. In our case, the dollar. Except that there’s been no notable decline in the dollar in recent years, thus calling into question the whole “inflation” narrative. There have been higher prices, but to say higher prices cause inflation is like saying heat is what makes the sun so bright. Causation is reversed.

We once again have higher prices, but are they any surprise in the aftermath of the 2020 lockdowns? Figure that political panic over the virus surely put a damper on investment, after which people working together around the world are the path to ever-declining prices. Starting in March of 2020, this global cooperation was fractured and broken to varying degrees. That production wouldn’t be as efficient and cheap after a wrench was thrown into the global production machine reads as a blinding glimpse of the obvious, as would the higher prices be obvious. Is this inflation? No. Inflation is a currency devaluation phenomenon. Nothing else.

Bringing this back to the world’s central bankers, they’ve mistaken higher prices born of command-and-control for inflation, only to compound their confusion with the assumption that the fix for today’s higher prices is global economic contraction. You can’t make this up! You see, governments already tried global economic contraction in 2020, only for higher prices to logically emerge from the carnage. The path to lower prices is copious investment combined with global cooperation, all instigated by a lack of government intervention. Central bankers believe business failure and unemployment are the path to lower prices. To say they’re a bit confused brings new meaning to understatement.

Which is why we should be so relieved by their lack of power. Again, if they were actually capable of doing the damage that their loser economic models call for, the global economy would be rather broken.

That it’s not is a happy sign that as central bankers fiddle, the actually productive work around them. And they’re able to work around them thanks to global capital flows that take place without regard to what central planners are doing inside central banks. More evidence supporting what is obvious is British semiconductor “unicorn” Arm. Funny about the Cambridge-based company is that on the day that the Wall Street Journal gave front page space to the aforementioned frustrations of central bankers, it similarly ran a story about how Arm would list its shares in New York instead of London. “Closed” global economy meet hapless central bankers.

While central banks mis-understand and mis-define inflation on the way to fruitless attempts to contract credit, the global economy continues to function. As one would expect. A bureaucrat is a bureaucrat is a bureaucrat. Remember this about central bankers. As they vainly search for a purpose, real economic activity will happily continue without regard to central bank economic illiteracy.