Why Central Banks Fail in Fighting Inflation and Recession

Description

Central banks often botch their mission to pursue high employment and stable prices while avoiding the dual banes of inflation and recession. The direct cause of the foul-up: a focus on lagging signals rather than current signs, let alone leading cues. Simply put, the stewards drive the economy while staring at the rear-view mirror. According to an old adage, economists have predicted 7 out of the last 3 recessions. Remarkably, though, one type of maven in the business world wields superb skills in pegging business cycles including early signs of recession and inflation.On the glum side, the blunders of central banks pose merely the tip of the iceberg of stumpers in the public sector. On the bright side, however, the proper course becomes clear enough once the sinkers have been charted and fathomed. From a larger stance, the culture of an entire society – namely, the totality of values and customs – does not change overnight. For this reason, the full range of problems surveyed here will not be redressed anytime soon.Yet, one hang-up in particular could and should be cured at once; namely, the shortfall of practical knowledge among the central banks of the world. The main deficit concerns the web of causes and effects behind the business cycle in areas ranging from waves of commercial activity and shifts in consumer demand to sprouts of budding inflation and curbs on hiring policies. As a remedy, a central bank worth the name ought to form a Board of Operative Counsel and pay heed to the insights and suggestions on hand. The Board should comprise a handful of adepts fully versed in the workings of the marketplace. In this light, an entrepreneur has learned through wrackful experience how to grasp the key factors ranging from the cost of inputs and shifts in demand to the bloat of inventory and need for layoffs. From the converse stance, a self-starter who does not learn to read the winds of change turns promptly into a failure and a dropout.To sum up, the central banks of the world botch their roles due to patchy knowledge of the driving forces as well as actual conditions in the marketplace. For starters, the policymakers rely on woolly models sprung from ivory towers. The airy yarns include fairy tales such as the boundless wisdom of producers and utter rationality of consumers, the instant adjustment of prices and perfect allotment of resources. One byproduct is a false faith in inapt yardsticks, as in the likes of lagging signals including the unemployment rate and the consumer price index. In a nutshell, the public sector suffers from myriads of flaws. A showcase involves the political class that panders to hoggish factions to the detriment of the entire society. Another sample concerns a shallow grasp of the driving forces in the economy along with their knotty impacts in areas ranging from production and employment to consumption and inflation. Happily, though, a cogent picture of the ills sets the stage for wholesome cures for public policy including monetary strategy.

About Steven Kim

Steven Kim is the founder of MintKit Institute (mintkit.com), a think tank on innovation and enterprise in a creative economy. The research programs span the spectrum from global trends and market dynamics to world-class ventures and competitive strategies. The author has trained and counseled self-starters of diverse backgrounds, ranging from budding entrepreneurs and senior executives to international investors and public officials.