EP 64: The Unanchored Central Banker (with Manoj Pradhan and Charles Goodhart)

**SPEAKER_1** (0:09)
Welcome to The Library of Mistakes, changing the world one mistake at a time.

**SPEAKER_2** (0:14)
This podcast is presented by Professor Russell Napier, Keeper of The Library of Mistakes. To find out more about the library, our events, our course, and much more, simply visit libraryofmistakes.com.

**Russell Napier** (0:29)
Hello, and welcome to another edition of The Library of Mistakes podcast. And I am delighted today to be joined by Manoj Pradhan and Charles Goodhart, authors of The Unchained Central Banker. And let me give you the subtitle because it helps to explain why they're unchained. Demography, Fiscal Instability, and an Erosion of the Central Bank's Inflation Fighting Ability. And the book does exactly what it says on the tin. I'm pleased to say, and that's what we will be discussing today. It doesn't pull any punches, it gets straight to the point. It's a quick read, but it will make you think for a long time to come, like your last book did, which caused a few ripples, I think, in amongst economists, amongst central bankers, and just shows if you're knowing those people, you're knowing all the right people at all the right times. And I think this book is going to do the same thing again. What I wanted to do was begin by reading from the preface because I've got a feeling that we should adapt this at The Library of Mistakes really as part of our mission statement, and the mission statement is too brief. It is changing the world one mistake at a time. But let me read from your preface.
Over the last few decades, the subject matter of economics has tended to become rather more specialized mathematical and precise slash rigorous. While this has many advantages, there should still be room for approaches which are more general, historical and broader in scope. As long as such approaches are mindful of the data, magnitudes and elasticities. Those working in some of these fields have produced models and analyses that are far too narrow to be realistic. So it's quite a statement. It's a statement which is being taken up more and more, I think.
Now let's get to the book where you do some of that analysis, that broader analysis and criticize some of the existing models. It would be tempting for me to say this is solely about fiscal dominance, but who would like to explain why it's about fiscal dominance, perhaps even starting from what fiscal dominance is, but other issues that you raise here beyond fiscal dominance and the need for central bankers to accommodate the funding that governments require. Who's taking up the banner and charging first in the battle here?

**Charles Goodhart** (2:44)
Manoj, I think.

**Manoj Pradhan** (2:47)
I'll give it a go. Well, the idea is, the central thesis is that fiscal policy is going to unanchor the central banker. In a sense, what you could have done in the past and what we've seen the Federal Reserve do in the past is to aggressively fight inflation. The most famous one obviously being Paul Volcker's charge. But that was when the debt to GDP ratio was about 30%. Even before the great financial crisis, you had a debt to GDP of around 60%.
That has more than doubled over the last couple of decades. That's changed the story about central banking almost entirely. Now, we're at a situation where if you do decide to aggressively fight inflation by raising interest rates aggressively, you also end up raising interest expenses.
You might manage to bring inflation under control for the near term, but a year or two down the line, what you're left with is the hangover from the fiscal side, which means you've got a larger stockpile of debt that you then have to fight in the future probably by allowing more inflation. So that past anchor that we had in the form of real freedom, which is something Isabel Schnabel mentioned very eloquently actually at the Charles Goodhart lectures at the LSE just a month ago, that has now dwindled and might disappear in the future. Where we are also different is we argue two things in the book that I think are quite important. Number one, the history of disinflation that we had, which was primarily through China's dominance through goods inflation, is probably disappearing fairly quickly. That means central bankers, if they want to fight inflation in the future, have to be far more aggressive and willing to hurt the labor market, just politically very difficult. And second, unlike John Cochran, who is really the dynamic mover of this fiscal theory story, we do not find ourselves in as optimistic a position as he is, to think that we can control fiscal policy. We believe that demography will lead to a far greater fiscal erosion, and politicians will be very reluctant to stand in the way of that, which means the future for central banking looks increasingly unanchored as we go decade by decade into what lies ahead.