The world has changed! It has changed in lots of ways, with (for example) the power of modern communications reducing most diplomatic staff to mere "visa stampers", as a Professor of International Relations put it at open day at Melbourne University.
We bring another example to the notice of readers, directly relevant to our core interest of macroeconomics. This comes courtesy of The Economist - "The mandarins of money".
Readers will recall our frequently reiterated views that the soft monetary policy at the start of this century generated asset inflation because goods and services inflation was held down by the rapid development of Brazil, Russia, India and China - the BRIC nations.
Central banks in developed nations have looked good with inflation generally within their target ranges or, in the case of the US (with no formal inflation target) low and fairly stable. This is despite US cash rates having been cut by Alan Greenspan to an astonishingly and inflationary low of 1 % in 2003.
The Economist shares our views about this matter. "The bubble in credit markets that now seems to be bursting and the frothiness of so many asset prices was encouraged by loose monetary policies which pumped liquidity into financial markets."
The staggering new insight concerns the source of global money and credit growth. "Many economists in investment banks and international institutions mistakenly assume that “global” monetary conditions are set by the central banks of the rich economies. Yet over the past year, a staggering three-fifths of the world's broad money-supply growth has flowed from emerging economies.
"Their mints are working overtime. Goldman Sachs reckons that growth in China's M3 measure of broad money has quickened to 20% over the past year. In Russia money supply has grown by a striking 51% and India's is up by 24%. Indeed, the broad money supply in emerging countries has increased by an average of 21% over the past year, almost three times as fast as it has in the developed world. Adjusted for inflation, their money growth has accelerated alarmingly (see chart). As a result, the entire world's money supply is growing at its fastest for decades in real terms.
Here's the rub. While central banks in developed nations have generally been given a degree of independance from political government, this is generally not the case in the emeging economies. The Economist again: "Some of the central banks that have been pumping out the most money, notably those in China, India and Russia, are among the least independent. The PBOC is under the sway of the Communist Party. The Reserve Bank of India would have raised interest rates more aggressively last year were it not for political pressure. Controversially, the [recent IMF] study reckons that both central banks are more independent than the Bank of Japan—another country where its own cheap money policy has created a flood of liquidity outside its borders, through the carry trade."
We have recently noted a similarity between China now and Australia in the early 1970s. This centres on China's still-fixed (if crawling) currency and therefore a total inability for technical reasons to control monetary growth and inflation - both of course rising rapidly. China may have to go through a decades-long learning curve if it is to get to the point where its central bank gov'nor can act more or less totally independant of gov'ment, as Glenn Stevens has in Australia by raising interest rates within months of an election and promising to do more of the same if necessary. (Even assuming that within decades China has elections that decide the fate of its politicians).
Globally, monetary policy is mostly in the hands of officials whose careers are totally in the hands of politicians. This is not a happy scenario, gentle readers.