Nostalgia wont help central bankers

Stephen King has been pushing hard the view that central bankers in developed countries (with the possible exception of the ECB which last week raised interest rates) have been too slow to react to the seismic change in the balance of power in the world economy. He has read the copious minutes of the monthly meetings of the US Fed and the Bank of England and has found rather scant reference to any of the economic developments in emerging markets. The world is changing and perhaps our monetary policymakers are not giving sufficient weight to the likelehood that commodity prices will remain much higher than their forecasts risking embedding a worsening trade-off between economic growth and inflation.

He writes:

“The biggest single economic problem facing the developed world is the deteriorating trade-off between growth and inflation. This is happening primarily because of the impact of strong emerging economic expansion on global commodity prices ............China has become the world’s most important marginal consumer of energy in recent years. It now consumes more energy than the whole of the European Union and isn’t too far behind the US. If China’s economy overheats, it’s no longer an internal Chinese prob-lem: through global commodity markets, China’s overheating becomes a problem for the rest of us as well.”

The rest of his article is here