Chronic. “In a fast-changing world, there are plenty of opportunities to make mistakes. “ Arthur Burns knew what he was talking about. During his two terms at the head of the Federal Reserve (Fed), from 1970 to 1978, the former adviser to Richard Nixon was very wrong, while the United States was confronted with the post-war period. Vietnam, the suspension of the convertibility of the dollar into gold and two oil shocks.
From his presidency at the central bank of the United States, history has above all retained his monetary policy missteps which led to a period of stagflation, a mixture of two phenomena that had until then been thought to be incompatible: high inflation and weak economic growth leading to mass unemployment. Ironically, it was a Democrat, Paul Volcker, who applied the recipes of the monetarist school to put out the fire. He raised the Fed’s key rate by nine points between 1979 and 1981 to 20%. A horse remedy that got the better of the rise in prices and wages, but also of growth and the presidency of Jimmy Carter.
Jerome Powell, who is about to be renewed as head of the Fed, and Christine Lagarde, his counterpart at the European Central Bank, in turn face the risk of inflation. The rise in prices reached 6.2% in the United States, a record since 1990, and 4.1% in the euro zone.
They too must contend with a rapidly changing world. The shock of the pandemic and the uncertainties it generates increase the likelihood of making mistakes all the more because central banks do not know how to get out of the situation they themselves have created. By flooding the financial system with liquidity and making money free with interest rates close to zero, they have favored the formation of speculative bubbles (real estate, stock market), encouraged a global debt that is close to 300 trillion dollars. , while worsening inequalities.
Ending this era of magic money means taking the risk of breaking hard-won growth and destabilizing financial markets that are never satiated with liquidity. To persevere in these so-called “unconventional” policies would be just as risky. Even though the 1970s are not the 2020s, Arthur Burns’ experience is here to shed some light.
His main mistake was to give too much importance to the “exogenous” causes of inflation. Burns was initially persuaded that the problem stems from the excessive power of unions to negotiate wage increases, and the monopoly of certain large companies which allowed them to raise prices as they pleased. But the price controls introduced by Nixon in August 1971 failed to calm inflation.
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