The annual global central bankers’ conference just ended in Wyoming, where it has been convened every August for four decades. Although central bankers gather monthly at the Bank for International Settlements in Basel to share thoughts mostly behind closed doors, the Jackson Hole gathering is the grand annual public event for them. What did we learn?[1]
Central Bank Independence
For most of the post-World War II era, the dominant public policy view has been that managing the value of money is best left in the hands of central bankers, a particular class of experts who act independently to preserve the worth of fiat money over time. Central bankers report to political authorities on the decisions they take and must present the arguments as to why they acted as they have. But the decisions are theirs to make.
The agreed task everywhere is to fight inflation, which erodes that value. Other common targets for central banks include foreign exchange management and often economic growth targets. The global watchword is “financial stability,” which all economic actors need for planning.
Money is too tempting for political leaders to be allowed near it, as history has shown repeatedly over millennia. Inflation is simply a tax that erodes the cost of public debt and creates other social harms.
August 2025
Investors have warned that big economies are entering a new period of “fiscal dominance,” in which central banks are under growing pressure to keep interest rates artificially low to offset the cost of record government borrowing.
The most prominent case is the US, where President Trump has endlessly shouted at the Federal Reserve to slash rates in order to save on debt-servicing charges. Government debt loads and rising borrowing costs in countries such as the UK and Japan are also putting central banks under pressure to ease monetary policy, whether through lower short-term rates or slowing down the sale of assets.
While the US stands out for the noise of the confrontation between the executive and the Fed, the global surge in long-term borrowing costs fueled by government spending has put other central banks under market pressure to adjust policy to contain rising yields. With more proportionate risk falling on longer maturities, investors are logically demanding a higher return. The current disparity between short-term rates — which are largely shaped by central bank policy — and more market-driven long-term borrowing costs at least partly reflects concerns that monetary policy will be kept looser than would be necessary to contain producer and consumer prices.
In both the US and the UK, the gap has widened along the yield curve. In the UK, the long-term rate is near a 25-year high. In the US, the louder the conflict, the more the rate gap widens, especially because chairman Powell’s term ends next May. There is no path for the president to get an inflation-induced surge in nominal growth from unduly low short-term rates without upward pressure on long-term rates which affect mortgages and bonds and treasuries.
The OECD expects sovereign borrowing among high-income countries to reach a record of $17tn this year, compared with $16tn in 2024 and $14tn in 2023. Yes, trillions. Investors are aware of this appetite and of the value of giving up their cash when monetary affairs are unstable. Developed-market central banks are still bringing their monetary policies and balance sheets back to a more “normal” setting, after years of quantitative easing following the Global Financial Crisis and the Covid pandemic, which did help their economies recover. But efforts to shrink balance sheets by selling these bonds, or simply not replacing the existing stock, can also push up yields and add to government debt servicing costs.
In Germany, which set the tone and metrics for a solid and reliable euro and is known for its balanced budgets, 30-year borrowing costs have risen above 3 per cent, the highest in 14 years, largely because of the new Berlin government’s plans to increase borrowing to modernize the country’s aging infrastructure and defense. Many economists worry that such trends will encourage governments to switch from long-term to short-term debt, exposing treasury markets to more interest rate fluctuations. Ideally, governments should be issuing long-term securities to match long-term projects and be stabilizing the treasury yield curves.
The countries with the biggest debt as a share of GDP may be the most exposed.[2] Veteran macro investor Ray Dalio has warned of a “debt death spiral” in an extreme scenario where governments are forced to borrow more to service surging interest costs. If bond yields get too high, central banks might feel forced to again intervene in the debt markets, create more fiat money to buy longer term bonds and force rates down, as in the quantitative easing seen post 2009. This reduces the value of fiat money.
Cryptocurrencies
Are these so-called currencies corrosive to the public trust in fiat money? When linked to a central bank’s fiat money, the so-called “stablecoins,” they are presumed to have a directly related shadow value – so then what is the point? If they are pure crypto inventions like Bitcoin, what are they worth? The creation of currency is a sovereign right of governments, and it fulfils a social and economic purpose. One wonders what the purposes of these parallel “currencies” really are.
In a purposefully provocative move, crypto leaders convened just up the road in Wyoming from the central bankers, in a public relations challenge (or stunt) to central bankers and their money management.
Yes, Gold
When it comes to what central bankers are actually doing, gold purchases these last several years make this store of value the second largest reserve asset held by central banks, behind the dollar and ahead of the euro.[3] It does seem prudent in a changing geopolitical environment that central bankers who believe in stable fiat currencies are backstopping their work with the world’s most ancient form of money.
This opinion ends with a question: what will happen if there is explicit political capture of any of today’s major central banks?
[1] “Investors warn of a ‘new era of fiscal dominance’ in global markets,” Ian Smith, Financial Times, 20 August 2025.
[2] “’Fiscal populism’ is coming for central banks,” Andy Haldane, Financial Times, 21 July 2025.
[3] “Central banks plan to boost gold reserves and trim dollar holdings,” Leslie Hook, Financial Times, 17 June 2025.