Roger Bootle is a British monetary economist. He had a good run a few decades ago. Since then, his warnings about monetary instability and inflationary risk have appeared less prescient.
But the next few decades may be kinder to him (if not to us).
He likens trying to control the economy by changing interest rates to dragging a brick across a table with a piece of elastic. And while he is duly deferential to the many improvements in modelling and forecasting over time, he worries that policy makers have lost sight of that:
“You hope to gently pull the brick across, bit by bit. But it usually doesn’t turn out like that. Either the brick doesn’t move or it flies across the table and hits you in the face.”
He also reminds us that brick-pulling takes place in a policy environment with prolonged periods of stability alternating with periods of profound adjustment.
“When you look at the history of interest rates, it is striking that they tend to move in great waves.”
“Major economic variables, especially the rate of inflation, also undergo wave-like movements.”
“Central bankers typically underestimate the strength of the momentum in these waves. Moreover, when they have cottoned on, they have often initially underestimated how much interest rates have to be increased in order to bring inflation under control.”
On the other hand, a central banker might note that Mr Bootle has been saying this sort of thing for the better part of twenty years without much sign of a tsunami.
But Bootle’s graphs do make you worry a little.
Interest rates on an upward trend from the end of the second world war to a peak in 1981. Then a long secular decline over forty years to the current level of pretty close to zero.
That forty years coincided more or less with the great house price boom. It ends with high levels of government indebtedness and – we are told – the need for unprecedented investment in infrastructure and the green energy transition.
While it would be lovely if our central bankers can keep interest rate rises down to a few basis points here and there, it might be a good idea to take some precautions against a brick in the face.
And it would be unwise to plan on the basis that the next forty years will be as kind to owners of real estate as the last forty.