Maybe Central Bank Focus Should Have Been On What They Can Influence In The First Place - Debt

Below, I link to a nice article on discussions, concerns and opinions from the recent annual gathering of central bankers at Jackson Hole in the USA. Inflation was understandably top of mind.

With globalisation taking something of a step back...first Covid-19 supply chain disruptions...then an escalation of Cold War 2...including the Ukraine invasion and a whole host of retaliatory measures against Russia....these events and others make it look like an increasingly fractured and perhaps "less globalised" economy supply chain, which could potentially imply higher inflation over a long period of time. This in turn may require higher interest rates over a lengthy period of time.

But while recent global issues driving inflation are largely outside of the area of central bank control, what seems far less spoken about is the area very much within central bank influence....i.e. levels of indebtedness within economies. Central banks have been expected to focus largely on inflation, while also on short term economic growth each time some growth pressure arises.

The expectation on central banks to boost growth, especially during a crisis, by fuelling borrowing throughout economies, and with no regard for the levels of household, corporate or government indebtedness levels in an economy, is where the monetary policy brief given to central banks has gone wrong I believe.

I believe that many role players in the economy have borrowed and lent based on some implicit assumption that interest rates would remain at very low levels, and that we could rely on central banks to alleviate any pressure by lowering rates in times of economic or financial pressure.

Now....enter a dramatic change in the inflation environment, and a central bank need to combat this inflation. But even an interest rate hiking cycle of moderate proportions, compared to hiking cycles of a few decades ago, could quickly cause severe financial pain due to the mountains of debt piled up now. Will such pain be palatable? I doubt it. I suspect it may be a case in many countries of..."if you can't make the target then adjust the target"....higher inflation targets perhaps coming.

Indeed, in this article some of the economists quoted have started rumbling about possible upward adjustments in inflation targets, and perhaps we will have to live with higher global inflation for a while. Is it all bad? Not necessarily, it may be the way to inflation the global debt-to-GDP ratio to a lower levels in the coming years. I'm not sure how else we reduce global indebtedness.

https://www.afr.com/policy/economy/global-economy-faces-greatest-challenge-in-decades-officials-warn-20220829-p5bdg5