Worried about Inflation? So is Fmr Central Banker Mervyn King

Episode Summary

Executive Summary: Bethany McLean and Luigi Zingales interview former Bank of England governor Mervyn King on central banking, inflation, and models. King argues central banks have overexpanded into politics, relied too much on faulty models, and may be underestimating future inflation risk from rapid money growth, asset-price inflation, and prolonged low rates.

Main Topics: Central banks and redistribution (Priority: 5/5): King argues low rates have redistributive effects, but the bigger problem is that central banks became the default responder to every economic problem and were blamed for outcomes they cannot control alone. Inflation risk after crisis-era policies (Priority: 5/5): The conversation focuses heavily on whether post-2008 QE and 2020 stimulus have created conditions for future inflation, especially given fast broad money growth and the Fed's new average inflation targeting. Limits of central bank mandates (Priority: 4/5): King warns against central banks taking on climate change and other political issues, arguing that such mission creep distracts from core monetary and prudential responsibilities. Models versus real-world judgment (Priority: 5/5): King says economic and epidemiological models often fail when they omit key variables or rest on untestable assumptions; models should supplement, not replace, direct inquiry into what is happening. Expert credibility and humility (Priority: 5/5): A major theme is that experts lose trust when they pretend to know more than they do. King repeatedly praises saying 'I don't know' as a mark of honesty and intellectual discipline. Measurement problems in economics (Priority: 3/5): The hosts and King discuss how GDP, CPI inflation, and asset prices are imperfectly measured and can misrepresent lived economic conditions, especially during shortages and service-heavy economies.

Key Arguments: Central banks should not be treated as the 'only game in town'; many slow-growth problems require fiscal, political, or structural solutions rather than repeated liquidity injections. QE after 2008 was largely defensive, meant to prevent monetary contraction, but the 2020 environment was different because money creation added to already-growing bank money and may be inflationary. The key inflation question is not just the monetary base but broad money growth; recent double-digit money growth in Europe and the UK and rapid U.S. M2 growth warrant caution. Very low long-term real interest rates are not easily compatible with a well-functioning market economy and have helped inflate asset prices relative to incomes. Central banks should avoid expanding into climate policy because it dilutes focus and repeats the pre-crisis mistake of taking eyes off prudential regulation. Models are useful only as aids to thought; when they omit the banking system or rely on shaky external assumptions, they can produce confident but wrong forecasts. Expert credibility depends on humility; political campaigns and public-health messaging lose trust when they quantify outcomes they cannot actually know. Inflation is particularly harmful to people with weaker bargaining power and lower incomes, making it a poor path if redistribution is a concern. Measured inflation undercounts some real-world pressures, especially asset prices, housing, education, and shortages that do not show up cleanly in CPI. The right institutional response to crises is an ex ante allocation of responsibilities between Treasury and central banks, rather than improvisation in the moment.

Data Points: Time since low-rate regime began: about 15 years - King notes a uniquely long period of near-zero rates without a meaningful upward cycle, which heightens redistributive concerns. Interest rates after the financial crisis: almost to zero - Used to describe the post-2008 global low-rate environment and its unusual persistence. Broad money growth in the U.S.: faster now than at any point since the Second World War - King cites this as a warning sign for future inflation risk. Money growth in Europe and the UK: double-digit levels - He says monetary growth rates are unusually high and deserve scrutiny. Inflation target: 2% - Discussed as the Fed's benchmark and the anchor that could be de-anchored if inflation is allowed to run above it. Potential inflation drift: 3% to 4% or 4% to 5% - King warns that once inflation rises above target, expectations can slip upward further. Italian inflation in late 1970s/early 1980s: 22% a year - Luigi Zingales recalls Italy's high inflation experience as a historical reference point. UK inflation in late 1970s/early 1980s: 25% - King cites the UK's double-digit inflation era as a cautionary example. US inflation in that period: well into double-digit figures - Used to show that even the U.S. experienced severe inflation historically. Economic loss estimate from Brexit debate: £4,300 per family - King criticizes the Remain campaign for pretending to know a precise household impact it could not credibly forecast. Small-town COVID testing example: 4,000 people - Zingales cites an Italian epidemiologist who tested an entire small town to learn key facts about asymptomatic spread. Asymptomatic share found: half of the people - The mass-testing example suggested roughly 50% were asymptomatic, changing pandemic assumptions.

Pivotal Quotes: "The people that I listen to most are the people who from time to time will say, I don't know." — Lord Mervyn King: King explains why humility is more trustworthy than false certainty from experts. "We have socialism for the very rich, rugged individualism for the poor." — Luigi Zingales: An opening line framing the podcast's broader critique of uneven capitalism before the interview begins. "The big mistake of the remain side was to say, Well, we are experts... and we know that every family is going to be £4,300 worse off if we leave the EU." — Lord Mervyn King: King uses Brexit to show how overconfident forecasting destroys credibility.

Implications: Listeners are urged to treat expert claims and model-based forecasts with caution, especially on inflation and crisis policy. Central banks may need narrower mandates, clearer crisis roles, and more humility as money growth, asset inflation, and political pressure rise.