MANY AND varied are the bull markets of the past 10 years, but one of the most memorable has been in independent central banks.
At the beginning of the decade, there were only three large countries - the US, Germany and Switzerland - that had genuinely independent central banks. Today they are too numerous to list, including our own Old Lady of Threadneedle Street. It has become a prerequisite for fully paid up membership of the global economy to have one, and the active pursuit through them of price stability has become one of the great economic mantras of the age.
But will it for ever be thus? This was the subject of a characteristically penetrating analysis yesterday by Mervyn King, deputy governor the Bank of England, to a symposium sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole, Wyoming.
Central bankers find themselves in a position of power and authority unrivalled in their history, so much so that it seems more than possible the impending millennium will come to be seen as the high water mark of their influence. In future there may be less of them, and perhaps, Mr King tantalisingly suggests, they may face extinction altogether.
There are essentially three reasons for thinking this. The first concerns the possibility that central banks screw up - that through over- vigilant pursuit of price stability they plunge the world into recession or worse. In such circumstances, as Japan has already discovered to its cost, the central bank becomes impotent to act. Since nominal interest rates cannot fall below zero, monetary policy becomes powerless in the face of falling prices and the central banker loses his purpose.
It is this possibility, already a reality in Japan, that makes our own "symmetrical" inflation target, where it is as much a sin for the Bank to undershoot as to overshoot, such an important innovation.
Perhaps a more tangible threat to the central bank's growth stock status is exchange rate volatility. Liberalisation of capital flows and the often violent exchange rate fluctuations which has gone with it has made governments a lot less keen on national currencies than they were. More regional monetary unions seem certain, or failing this, the creation of currency boards or even complete currency substitution, as mooted by Argentina at the height of last year's currency turmoil. Either way, there is less of a need for national central banks.
But according to Mr King, the most potent threat comes from technology. This is where we begin to enter the world of science fiction, for although the Internet's impact on all aspects of the economy has already been profound, the real turbo charged effect is yet to come. …