(Bloomberg) — Tim Congdon, a seasoned UK monetarist who was an early prognosticator of the global inflation shock, suggests that the Bank of England should prepare to halt interest rate hikes before a projected recession early next year.
Citing a decline in money-supply growth — the metric whose surge in 2020 prompted him to first warn of an impending wave of rising prices — he asserts that policymakers should only stray “a little bit more” above the benchmark’s current level of 1 percent, and that a recession is already probable and necessary.
Earlier this month, Congdon gave a wide-ranging interview to Bloomberg in which he attacked central bankers including Bank of England Governor Andrew Bailey, arguing that calls for wage restraint among workers were “wicked,” and criticized the economics profession that he has long shunned.
Congdon, who worked for Margaret Thatcher’s Conservative government in the 1980s as an adviser on changing macroeconomic policy, was one of the first people to say that the pandemic would cause price inflation in the UK and the US that had never been seen before.
He predicted double-digit inflation in June 2020, just as economies on both sides of the Atlantic were headed for recession and prices were hitting rock bottom.
“It was the most important call of my career,” he declared. “I very much got it right.”
Other similar seers, such as former Bank of England policymaker Charles Goodhart, former Treasury Secretary Lawrence Summers, and former International Monetary Fund head economist Olivier Blanchard, have enhanced their reputations.
But most economists haven’t paid much attention to Congdon’s monetarism for at least 20 years. This is the idea that inflation can be controlled by limiting the amount of money in circulation.
Over the years, central banks have degraded statistics on monetary aggregates, and Congdon has become a relic, most notably as the economics spokesman for the pro-Brexit UK Independence Party.
But his ideas and those of his economic hero, Nobel Prize winner Milton Friedman, have become more popular again now that inflation in the UK (9%) and the US (8.6%) has reached its highest levels in 40 years.
The founder of Bridgewater Associates, Ray Dalio, has issued a warning about “monetary inflation” fueled by “a great deal of debt and money.” At Amundi’s World Investment Forum last week, Blanchard said, “I know I sound like a monetarist when I talk about how central banks should handle inflation.”
Former Governor of the Bank of England Mervyn King has accused central banks of making a “intellectual error” by maintaining excessively low interest rates and injecting money into the financial system through quantitative easing. Summers has also brought attention to the increase in money supply.
Congdon foresaw the current price shock by analyzing broad money growth, a parameter that was as closely monitored as inflation in the 1980s. In 2020, it increased by 25% in the United States and by 15% in the United Kingdom. According to him, a monetary expansion of that magnitude can have only one conclusion.
Critics argue that Congdon was correct for the wrong reasons, and that inflation is a result of supply-chain bottlenecks, increasing energy prices, unforeseen labor shortages owing to the epidemic, and now the conflict in Ukraine. He says that these things wouldn’t have led to inflation if the money supply hadn’t grown so quickly.
“We experienced a negative supply shock,” he said. “You cannot avoid adversity, but if you respond by printing money, inflation will ensue.”
Congdon is critical of both British and American central bank officials. Ben Broadbent, the Deputy Governor for Monetary Policy at the Bank of England, “failed to estimate the impact of creating billions of pounds of quantitative easing,” he claimed. Everyone involved should simply accept their error.
Congdon believes he would be “on the dovish side” of the Bank of England’s Monetary Policy Committee right now, if only because money growth has fallen since the withdrawal of stimulus began last year.
A significant, active reversal of quantitative easing, as the BOE is contemplating, would “make the recession worse than necessary,” he added. Congdon likewise rejected the possibility of a wage-price spiral.
He stated, “Trade unions do not generate inflation, but they may increase unemployment.” If companies are reporting labor shortages, inflation is a symptom, not a cause.
He stated that Bailey’s suggestions for wage restrictions among workers are “wicked.”
Congdon stated, “The working classes have the right to demand everything they can obtain, and they should negotiate for it.” “Academic economists are to fault for the cost-of-living crisis. They are horrible people. Not those in the working classes. “
In 1986, after then-Chancellor of the Exchequer Nigel Lawson discontinued the government’s wide money objective, Congdon issued his first major inflation warning. Britain quickly encountered a housing bubble and a price increase of 8.4%, its highest level to date. He then established Lombard Street Research, which he directed until 2001.
He is now leading the Institute for International Monetary Research. He is still an outsider in the field where he built his career, and he has contempt for its academic establishment. In spite of the fact that central banks are to blame for inflation, “the guilt lies with the economics profession,” he says, deriding its “trite” and “inbred” mindset.
Congdon stated, “It is a disgrace.” What is taught at universities is entirely incorrect.
Bloomberg L.P. 2022