Yesterday, in an interview with Le Monde, former Bank of England Governor Mervyn King offered his advice. Asked if we are seeing a turning point, King says: “we are returning to a world of more normal interest rates. The consequences will be very important because the world has accumulated debt. In the long run, there is reason to be optimistic because higher interest rates can improve the performance of the economy. But the transition may be very difficult.”
Asked if the central banks are responsible for the current inflation surge, King says that “their big mistake was to stop thinking about the money supply, and to focus only on inflation expectations. Their theory was that if people thought inflation would stay low, then wages and prices would stay low. The problem was that it didn’t answer the question of what drives those expectations. The argument was completely circular…. Under these circumstances, in 2020 and 2021, central banks ended up printing a lot of money. The old-fashioned economics textbooks of the 1950s or 1960s would have said that inflation is the consequence of too much money for too few goods and commodities. That is exactly what happened during the pandemic.”