Being bad - temporarily abandoning their hard-won reputation for prudishness - is a vital trick they must pull off if they are to help the developed world’s economies return to an acceptable pace of growth.
The problem they have had to address is what happens when a country's economy falls into a 'liquidity trap', which is where Japan's has been for years and the UK's and European Union's increasingly look as it they're tottering into. Proof of the trap is that interest rates get so low that they stop working. In inflation-adjusted terms, rates become negative across all maturities so lenders no longer have the incentive to borrow short and lend long. Worse, they become frightened of doing so and what they fear is the central bank’s prudishness. Specifically, they fear that the central bank - doing what it has to do - will raise interest rates to tackle inflation that's persistently higher than wanted (just like in the UK currently). But higher interest rates will make long-term lending unprofitable, so lenders shy away. Without the lending that greases the wheels, the economy gets stuck in its liquidity trap - and all because of the central bank’s prudishness.
Therefore, the central bank's challenge is to break the cycle, but not at the cost of lasting damage to its own reputation. Yet increasingly in the past few months central bankers - at least partly at the behest of governments from whom they are supposed to be independent - seem willing to put their reputations on the line. The most extreme expression of this is the Bank of Japan's readiness to print however much money is needed to raise Japan's inflation rate to 2 per cent. But central bankers in the US, UK and the EU - by action or by intent - have eased their monetary policies, too.
Clearly this approach brings dangers. The most infamous inflation of modern times - that of Weimar Germany in the early 1920s - only really cranked up when the Reichsbank made clear it would print enough money to bring Germany’s reparation obligations to manageable nominal levels. There seems to be a disconcerting parallel in the thought processes of both Rudolph von Havenstein, the president of the Reichsbank then, and Haruhiko Karoda, the new governor of the Bank of Japan, which can be summed up with one phrase: "We’ll do whatever it takes."
True, the chance of Weimar-style inflation swamping Japan in the next five years is only slightly more likely than a return to the gold standard. Even so, the thing about inflation is that no one really knows where it comes from or how to control it.
Proof of that - of sorts - is the inflation that is already rampant in the developed world. No one is sure how to control this particular variety, but few care because asset-price inflation is generally popular. However, that does not make it good.
In a way, it does not do to criticise rising prices of shares, bonds and property in the Investors Chronicle. After all, this is what our readers want. But think it through. Asset-price inflation is just consumer-price inflation brought forward. Price rises that should accrue over many years are squashed into a short period. And, like all types of inflation, it confuses relationships between creditors and debtors, borrowers and lenders, buyers and sellers. So it brings benefits to some and disadvantages to others. House-price inflation benefits home owners, but not those struggling to get on the property ladder. Similarly, share-price inflation benefits those with a business to sell, but not those who want to buy and develop one. Or, it may encourage buyers to make bad decisions because they assume that prices will continue rising and so pay insufficient attention to what they are buying.
More generally, asset-price inflation benefits those who have at the expense of those who aspire; benefits those who have built at the expense of those who want to build; and benefits the old at the expense of the young.
It’s hard to argue that that's good. On the other hand, it’s reality and - for the time being - looks like being here to stay. Which is another way of saying that, while the world's central bankers seem so keen to get a party going, it seems churlish not to join in. So I have re-shuffled weightings in the Bearbull Global Fund and bought a holding in an exchange traded fund - iShares MSCI Japan SmallCap (code: ISJP) - that does what its name indicates (see this column, 15 March 2013).
Unlike in my youth, I hope that the central bankers' party does not turn into debauchery. Then again, I ask: if it was Lenin's proposition, why would it? Almost everything else he predicted turned out wrong.
