September Newsletter: ‘When the Goalposts Need To Change’

15 September 2023

Watching the recent Woman’s Football World Cup made me think of how rules written in ink, tend to get set in stone. The size of the football goal looks bigger when there is a woman rather than a man defending it. Why don’t they change the size for women? Well, it seems until 1952 the size of goals did vary but then FIFA standardised goalpost dimensions. The rules became written down. So today there is little thought that men are now on average three inches taller than they were in 1952, or woman actually play the game. The crossbar (for men) should be 5 inches higher if FIFA had set the parameters to move with the times. But just think of the kerfuffle if some suggested changing the rules. Simply just not worth the hassle.

The financial world is beset by similar made-up rules. But unlike football with one governing body, there is a least one governing body per country. That means the rules change more often than in football and few of them are same across the world. However, there is one rule that has gained global parlance. And it is getting more than its fair share of attention just now. That is the 2% inflation target set by most central banks. It might surprise you that this is a relatively new invention. Born in the early 1990s. Thank you New Zealand! The U.S. Federal Reserve only hopped on board in 2012. Yet, today, the 2% rule is the star of the show. Headlines scream, central bankers lose sleep over it, making out that they would probably wrestle an alligator or two to make sure we hit that target.

Don’t get me wrong Central banks have done a decent job for the past two decades, but it feels like they’re singing “2% or Bust!” a bit too loudly. Especially when you look beyond inflation and see things like asset prices and debt levels acting all mischievous. Picture the 2% inflation target as the crossbar to our goal, and debt levels as the goalie. Back in the 1990’s when everyone’s debt levels were much lower our ‘debt goalie’ was proportionate to the goal. Central banks could hit their targets. But as they congratulated themselves on their ability to hit their new target (hugging and kissing each other at world cup finance events like Davos and Jackson Hole) they ignored that ‘debt goalie’ growing.  Now the goalie is so large it is impossible for the central banks to score. So, they have a choice. They can deflate the size of the debt goalie quickly or they can raise literally raise the inflation bar. This sounds a scary thing to do because after all the rules written down in ink tend to be set in stone! But deflating the size of the debt goalie too quickly will cause a lot more pain and hardship.

So, in short, brace yourselves for the likelihood that inflation might be hanging around at higher levels for longer, all because our goalie (debt) needs a higher crossbar. The rules may stay the same, but sometimes, to keep the game alive, you’ve got to bend them a bit. If our central bankers remain wedded to their own made up 2% target, then there is a good chance they will score an “own goal” in the process. I think they realise this already; they just aren’t telling us!! That would cause too much of a kerfuffle.