This is Alan Kohler explaining why “Central Banks Are Destroying The World”. There’s no doubt they are doing everything they can, and there are not a lot of people around who will say this in public. But I mention his comments since it is nice to see myself mentioned in despatches.
These days our “patrician overlords” are central bankers, benignly manipulating our behaviour (“aggregate demand” they call it) by adjusting the price and availability of the thing we all so crave – credit.
The question for this week is: what should they, and you, do instead? Bearing in mind the old joke that if you wanted to get to Dublin, you wouldn’t start from here.
Well, there’s no doubt in my mind that “they” – the Fed, ECB and Bank of Japan – need to start raising interest rates pronto, and stop worrying about inflation being too low. It’s caused by technology reducing costs and debt suppressing consumption and investment – not by a shortage of demand that can be reversed by monetary policy. Specifically they should allow the market to set interest rates, just as the market sets most other prices. But these are not, to say the least, mainstream opinions.
As an old friend of mine, Steve Kates of RMIT University, wrote in his book Free Market Economics:
“Today, there is no aspect of an economy’s structure that governments do not believe themselves capable of making a positive contribution towards. … Such actions are not undertaken with a sense of dread at the possible unintended consequences. They are undertaken with a confidence that is simply unwarranted…”
“To believe that some central agency can plan ahead for entire economy is one of the major fallacies often associated with economic cranks. No single person, no central body, no government agency can ever know anything remotely like what needs to be known if an economy is to produce the goods and services the community wants, never mind being able to innovate or adjust to new circumstances.”
In my view, those “goods and services” include credit. Our patrician overlords at the central banks believe themselves capable of determining how much of it we need and at what price.
The Keynesian economic central planners went into hiding after the Berlin Wall came down in 1989 and the failure and corruption of Soviet style Marxism became evident. After that, and after the recession of 1991, the world had 10 years of spectacular growth due, in part, to interest rates being left to find their own level. However after the tech crash of 2000, the real Fed funds rate was taken negative – what Keynes called “the euthanasia of the rentier” – on the basis that wealth creation through rising assets prices would lead to economic growth.
Charles Gave of GaveKal Research calls this “one of the stupidest ideas ever put forward in economics”. It led to an explosion in debt and speculation on housing, which led, in turn, to the 2008 credit crisis, and Great Recession.
Instead of learning from this mistake, the central bankers then went all the way – reducing nominal rates to zero and keeping them there for six years.
To a large extent the current thinking is based on the proposition that we face “secular stagnation” a phrase rediscovered by former US Treasury Secretary Larry Summers (it was originally coined by Alvin Hansen in 1938, in a book called “Full Recovery or Stagnation?”).
Those promoting this idea today don’t remember that it’s the same incorrect argument that was floated towards the end of the 1930s, and they don’t believe that if left to its own devices the economy would go back to normal. Instead they think the world’s entrepreneurs, business people and consumers would somehow remain comatose if central bankers et al didn’t poke at them to wake up. Central bankers have never run a business themselves but are totally confident in their ability to goad businesses and consumers into action and then distributing the proceeds.
These are the misguided vanities of what Lewis Lapham calls our patrician overlords. Economic growth is failing to recover because central bank actions have increased the stock of debt, which is weighing on the world’s economy like a heavy blanket. It needs to be cleared, through being priced correctly and borrowers and lenders recognising their losses. In other words, the free market must apply.
As Steve Kates wrote: “The problem lies in the belief that that the natural state for an economy is for it to be growing with unemployment low, when the reality is that the natural state for an economy is that it is adjusting to new circumstances during every moment of every day.”
The greatest of all Keynesian disasters was to promote the idea that economists have any idea on what to do to make economies grow. As it happens, our growth over the past sixty years has been in spite of our economists, but I think the economic cranks are now in such control that they are pushing our economies backwards at unprecedented rates.