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David Jane: last year's battle is next year's crisis
by David Jane on Aug 08, 2013 at 14:43
One of our central themes is the extent to which monetary orthodoxy has changed as a result of the financial crisis.
It can be said that governments and central bankers tend to set policy in reaction to the previous battle and we think it is this that often gives rise to the next crisis.
The ethos of central banks for the eighties, nineties and up to the financial crisis was the battle against inflation. It can be argued that focussing solely on inflation was one of the main causes of the financial crisis.
Monetary policy focus has since completely changed and is now on economic growth; this forms a central plank of our investment thesis and will likely, in time, give rise to the next crisis, although we think this is a long way off.
This week has seen further evidence to support this thesis in that Mark Carney has promised to target job growth.
This is arguably a complete reversal of the Bank of England’s previous policy of focussing solely on inflation, which is in fact its mandate.
The devastating effects of uncontrolled inflation in the 1970’s gave rise to the philosophy that the central banks’ primary was to maintain price stability.
This philosophy was best encapsulated by the quote from Milton Friedman, the most famous monetarist economist, 'Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.'
These days we regard that quote as almost tautological, but at the time it was a radical statement. We would argue that following this teaching to its logical conclusion is what gave rise to the recent financial crisis.
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