Central Bankers Push More Economic Contraction at Jackson Hole

Looking for the rationale of the messages given by the two major central banks in the world, the Federal Reserve and the European Central Bank, at the yearly central bankers meeting in Jackson Hole, Wyoming Aug. 25-27, is useless.

Both the Fed’s Jerome Powell and the ECB’s Christine Lagarde warned that high interest rates are here to stay longer, regardless of the consequences for the real economy. But Powell denied the ongoing contraction of the U.S. economy in terms of industrial production, manufacturing and credit. The purpose of this may simply be the continuation of financial warfare against the yuan and developing sector currencies, and the BRICS more broadly.

While both central bankers said inflation remains their main concern, they studiously avoided naming their own monetary policies among the causes. Lagarde’s description of the current financial-economic situation was (paraphrased): inflation is caused by supply shocks, to which central banks have reacted with … cutting supply even more (through higher interest rates). To save the planet, she said, we will implement policies that produce more supply shocks and inflation—therefore, we will curb supply further (with more interest rate hikes). And by the way, we will have to spend a lot for rearmament.

Lagarde’s lingo is as twisted as her analysis. These are selected exact quotations:

• “Climate change is accelerating, compelling us to do all we can to decarbonize the economy.”

• “We are already witnessing the effects of accelerating climate change, and this will likely translate into more frequent supply shocks in the future. More than 70% of companies in the euro area have been estimated to be dependent on at least one ecosystem service.”

• “The shift in the global energy mix is also likely to increase the size and frequency of energy supply shocks, with oil and gas becoming less elastic while renewables still face intermittency and storage challenges.”

“Reshoring and friend-shoring also imply new supply constraints, especially if trade fragmentation accelerates before domestic supply base has been rebuilt. ECB research finds that, in a scenario where world trade fragments along geopolitical lines, real imports could decline by up to 30% globally and could not be fully compensated by greater trade within blocs.”

For example, the energy transition will require massive investment in a relatively short time horizon—around €600 billion on average per year in the EU until 2030. Global investment in digital transformation is expected to more than double by 2026. And the new international landscape will require a significant increase in defense spending, too: In the EU, around €60 billion will be required annually to meet the NATO military expenditure target of 2% of GDP. Even if carbon-intensive capital is written off more rapidly, all this should lead to higher net investment….

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