C: World Economic Forum / Flickr / CC BY-SA 2.0

Christine Lagarde and the pretence that lockdown didn’t cause inflation

Came 'out of nowhere'?

Christine Lagarde recently appeared on the Late Late Show, wearing a nice green scarf to show solidarity with Ireland, and to explain why the European Central Bank was rolling out the kind of interest rate hikes that are giving mortgage holders sleepless nights.

These actions were needed to tackle inflation, she said. But her assertion that “Inflation has just pretty much come about from nowhere,” was what really caught my attention.

What a spoofer.


Lagarde is no naïve political commentator: she is in a particularly powerful position as head of the European Central Bank-  and she knows very well what actually led to inflation sharply rising well before the crisis in the Ukraine erupted.

So these kinds of statements do not come from a place of ignorance, rather they are part of a narrative seeking to placate an increasingly upset and angry electorate who fear, not just recession, but the real prospect of losing their homes as mortgage repayments continue to rise.

Nowhere in the conversation on the Late Late Show did Lagarde acknowledge that, in fact, inflation did not ‘come out of nowhere’ – it started rocketing because of the Covid lockdowns and the wholly destructive policies adopted by various governments who somehow imagined that you can shut down production and just print money and not drive up inflation.

This was spelled out recently by a former Governor of the Bank of England, Mervyn King, who said that all the central banks made the same mistakes – printing money during lockdown to pay things like PUP and other subventions which were necessitated by decisions to force people to stay at home for an absurdly long time to combat a virus that proved not to be anything like as deadly as was first believed.

“I think all central banks in the west, interestingly, made the same mistake. And during Covid, when the economy was actually contracting because of lockdown, Central banks decided it was a good time to print a lot of money,” King told BBC. “That was a mistake. That led to inflation.”

“We had too much money chasing too few goods. And the result was inflation. That was predictable. It was predicted, and it happened.”

King was, of course, stating the blindingly obvious. And he had previously made the point that central bankers had adopted a “King Canute” theory of inflation – because they relied on models which always showed inflation coming back to the target sought by the bank whatever the level of interest rates.

“This is the King Canute theory of inflation. A thousand years ago, King Canute of England set his throne by the seashore and commanded the incoming tide to halt. The tide continued to rise and dashed over his feet and legs, driven by the laws of nature,” he said in a lecture to the Institute of International Monetary Research.

“A satisfactory theory of inflation cannot take the form ‘inflation will remain low because we say it will’; it has to explain how changes in money – whether directly via quantitative easing or indirectly via changes in interest rates – affect the economy.”

So what did the central banks do? In Ireland, of course, our policies are largely decided by the European Central Bank, headed by Ms Lagarde. The ECB sets our interest rates, so we can’t even decide when to use that measure to tackle inflation but I’ll come back to that.

It should have been obvious to any economist (Lagarde is a lawyer and politician, not a banker or economist) that the excessive and never-ending Covid lockdown, which had devastating effects on the supply of goods, was going to drive up inflation – especially when governments, aided by the central banks, were printing money to fund the locked-down population.

This pent-up demand was always going to drive up the price of everything, especially when supply chain issues did not immediately resolve themselves as the lockdown eventually lifted – and then energy prices began to rise.

Look at this chart from trading economics – Ireland’s inflation rate started to climb from historically low rates after mid-2021 as the impact of the Covid lockdown started to really hit, so it wasn’t just the lockdown but also the ECB’s decision to print money that led to runaway inflation even before Putin invaded Ukraine.

It’s worth revisiting the ECB’s proud declaration of its efforts during the Covid crisis. It was keeping borrowing “affordable” by keeping “key interest rates at historically low levels”, it said.

The ECB also boasted that “a whopping “€1,850 billion pandemic emergency purchase programme” was used to print money so that governments could fund Covid relief programmes, and banks could provide cheap loans. This approach has been used by the ECB for years, despite the eurozone seeing pretty much stagnant growth in that period.

Now, the ECB is belatedly hiking up interest rates to undo the damage caused – and claiming that inflation ‘came out of nowhere’. It didn’t.

The same sleight of hand is seen when it comes to energy prices. The frankly risible discussion about Vladimir Putin on the Late Late Show (bogeyman stuff about “flashing, freezing eyes” ) was part of a wider narrative about energy that is also deeply dishonest.

The International Energy Agency (IEA) noted in October 2021, months before the Ukraine crisis, that oil and gas had “jumped to all-time highs, taking electricity prices with them”.  They explained that energy supply from oil and gas was being impacted by a fall in investment – without ‘green’ energy sources and technologies to ‘fill the gap’.

Again, after the Covid lockdown, the global economy ‘rebounded’ with sharp increases in pent-up demand – and the supply side was hit, the IEA said, by “weather-related events”, such as a cold winter and lower than average wind-generation, because that’s the things about renewable energy – its not reliable.

The lockdown also affected energy infrastructures. “The Covid-19 lockdowns pushed some maintenance work from 2020 into 2021, which weighed on supply at a time when demand was recovering. The impact was particularly tangible in the UK and Norwegian areas of the North Sea Continental Shelf. In addition, unplanned outages at LNG liquefaction plants, upstream supply issues, unforeseen repair works, and project delays all further tightened the global gas market” said the IEA.

Now, there is no denying that the invasion of Ukraine made a bad situation a lot worse, as the West sought sanctions on Russian oil and gas, and Putin reacted in kind. But the narrative that inflation and energy price hike ‘just happened’ is grossly untrue.

In fact, if the war in Ukraine stopped in the morning, Irish consumers – like people right across Europe – would still be faced with hugely problematic costs as the EU continues to insist that green policies be implemented even if the cost is punitive and the technology unreliable.

And the EU – which Ms Lagarde represents in her capacity as head of the ECB – causes an additional layer of problems for Ireland when it comes to trying to tackle the recession that is hurtling down the tracks at us.

As my colleague John McGuirk previously explained: “The problem for Ireland is that not having control over its own interest rates means that we cannot, in effect, manage the timing of our own recession. If we had control over our own rates, arguably Irish interest rates would already be much closer to the UK’s 1.75% than the ECB’s 0.00%. That leaves us vulnerable to two problems: First, rates may not rise fast enough to combat inflation in Ireland, which could soon see that problem getting far worse than it already is. Second, rates may rise at a time when inflation is easing in Ireland, tilting us into recession unnecessarily. The Irish Central Bank, effectively, is captain of a ship where the steering wheel is being controlled by someone on another continent, remotely.”

Christine Lagarde wasn’t asked about any of these realities on the Late Late Show, of course, or challenged about her assertion that inflation came out of nowhere. Her claims were then dutifully repeated across the main media platform here and in many other countries.

Now, RTÉ might say that a chat show is not the forum to robustly debate economic policy – but why have her on the show –  with its guaranteed audience of middle Ireland – if she was not to be asked hard questions or held to account?

Why indeed. That’s the real question isn’t it?


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