It’s deeply ingrained. As citizens, the culture in which we were all raised has fostered in us all a firm belief that Those In Charge know what they’re doing.
Obviously, I’m not talking about politicians, of course. They’re amateurs, like us. Amateurs with a happy knack for getting elected. Or not.
No, I’m talking about the civil service, and those other august quasi-governmental bodies that Keep Things Running. They’re the people who are really in charge. And deep down, we all like to think that they know what they’re doing.
Exhibit A: the Bank of England
But do they, in every case?
I’m not so sure. And specifically, I’m talking about the Bank of England.
Now, the Bank doesn’t have an easy job. No central bank does. And nor — despite possessing a couple of economics degrees — am I necessarily best placed to judge its competence. Microeconomics is my thing, much more than macroeconomics.
But even so, the Bank’s record on some things has been abysmal.
Inflation? No need to worry: it won’t happen
As I’ve written before, back in mid-2007, the Bank of England famously saw no chance whatsoever of the 2007-2008 financial crisis and ensuing recession occurring — even though it was just weeks away.
Not a single one of the hundred scenarios famously modelled by its economists in the Bank’s quarterly ‘fantail’ projection envisaged the crisis at all.
More recently, back in the summer of 2021, I warned of the prospect of higher inflation. Markedly higher inflation. I could see it.
The Bank dismissed such fears. Its view was that it expected inflation to rise to no higher than 3% by the end of 2021: talk of higher numbers was mere speculation, and to be discouraged. Even though such speculation was coming from — among others — the Bank’s departing chief economist Andy Haldane, whom I’ve always held in high regard.
And we all know what happened next: inflation promptly rocketed skywards.
Suck it up
Which takes us to the present day, and two more extraordinary pronouncements from the Bank of England.
The first, at the end of April, was a comment from its current chief economist, Huw Pill. People “need to accept” that inflation has made them poorer, he said. They should accept that they’re worse off, and desist from bidding up prices and wages in an attempt to maintain their standards of living. Suck it up, in short: accept a lower standard of living.
An extraordinary viewpoint, indeed, from the organisation tasked with keeping inflation below 2%, and keeping the economy on an even keel. And before long, it was a view that was publicly rowed back by both Mr Pill and his ultimate boss, Andrew Bailey, the Bank’s governor.
“If I had the chance again to use different words, I would use somewhat different words,” conceded Mr Pill in a Bank of England webcast. “I don’t think the viral response [to that statement] has been very helpful to our communications.”
You’re telling me…
Our crystal ball is broken
But better — or worse, depending on your point of view — was to come.
Speaking to the House of Commons Treasury Select Committee in late May, Andrew Bailey conceded that the Bank had “very big lessons to learn” after failing to predict both the recent high level of inflation, and its dogged persistence.
Events, it transpired, weren’t turning out as the Bank’s economic models had forecast.
Gosh. Who would have thought it?
Consequently, added Mr Bailey, the Bank was no longer relying so heavily on its economic model, as it was no longer producing accurate results. Gut feel and luck, one gathers, are the replacement stratagems.
Who’s running the economy?
Which takes me back to my initial premise. Much as we’d all like to think that Those In Charge know what they’re doing, the Bank isn’t so sure.
They’re in charge of the economy, but flying blind without an economic model that works reliably. And that’s them saying that, not me.
But ‘the economy’ isn’t some idle theoretical construct. It’s a framework within which we all live and work. It’s my wealth; it’s your wealth — it’s the collective wealth of all of us.
And as we’ve seen, its management — and the decisions taken regarding our own personal bits of it — we now understand might not be in the most assured of hands.
A buffer against adversity
My response is to increase the buffer that I maintain against economic adversity — a cushion of wealth on which I can fall back if times get hard. Or if inflation erodes the purchasing power of the money I live on.
It was a lesson I personally learned — the hard way — during the 1990-91 recession, which was then reinforced in the next deep recession to come along, the recession of 2008-09.
With inflation stubbornly high — the latest figure of 8.7% is better than last month’s 10.1%, but only slightly — forget cash. Interest rates are rising, but inflation is eroding the purchasing power of any money you might have in the bank.
Forget gold and other investing exotica, too. I’m going for shares in decent, quality businesses that will sustain me over the long term.
The Bank might be telling me to “accept that I’m poorer”, but I’m not going gently into that good night. Oh no.
