Last year it was the OECD; now it’s the Bank for International Settlements. Once again, Very Serious men at an international organization seem determined to find reasons to tighten monetary policy in the face of a continuing deep slump.
The BIS cites rising commodity prices and rising implied inflation forecasts based on interest rate spreads. The thing about reports like this, however, is that they have to be written and approved by committees, which means that they’re based on lagging data — and sure enough, both interest spreads and commodity price inflation are telling quite different stories these days.
The report also argues that potential output has been permanently reduced by the slump, arguing in particular that “the destruction of human capital due to long-term unemployment” will weigh on growth. You might think that this was a reason to take urgent action to reduce long-term unemployment. But no.
And, inevitably, there are the alleged parallels with the 1970s. Except their own data suggests hardly any parallel at all. Here’s one comparison (ULC is unit labor costs):
Headline inflation and unit labor costsNotice the difference in scales. In the 1970s there was a major wage-price spiral; this time none at all. But whatever.
And the BIS also goes for a lot of vague warnings about how low interest rates discourage responsible behavior.
There’s something going on here, and I don’t think it’s really about economic analysis. Like others, the BIS is clearly engaged in monetary Calvinball, making up rules and concepts on the fly so as to justify monetary tightening whatever the circumstances. There seems to be a deep urge to inflict pain, to purge the rottenness or something.
It’s scary. And the world will suffer for it.