Friends who bother enough to listen to my whining tend to think me an extremist. All this talk of dismantling the welfare state, repealing harmful licenses and regulations and taking the power away from the executive and giving it back to the market is scary. So if I were to be more moderate in my demands to address all these mistakes in our present sociocapitalist arrangements and content myself with only one issue and one campaign, I do not hesitate to say it would be directed against central banking. No other flaw in our system causes more damage, in my view.
Central banking is a relatively recent innovation. It is not the oldest “central banks”, the Dutch Wisselbank, the Sveriges Riksbank or the Bank of England of the 17th and 18th centuries, but rather that same Bank of England’s 1844 monopoly charter that started the idea that a nation can and should have only one currency issued by only one bank. This monopoly on the supply of money is at the heart of the problem with central banks.
The other main problem, is the usual hubris that comes along with central bureaucracy, the idea that some genius can concoct a better outcome than the market. Always use the right tool for the job. A hammer is the right tool for any job and anything can be used as a hammer. The central bank has two related tools at its disposal: interest rates and money printing. And boy, do they use them!
Without any competing banks to issue any competing currencies and with the law enforcing the payment of debts, display of prices and the settlement of all contracts and taxes to be in the monopoly central-bank issued currency, the amount of money issued by the central bank (mostly done only digitally) and the amount of interest it charges commercial banks for money advances have an enormous impact on the economy and society at large.
The central bank’s tool is in a sense just one: inflation. Inflation in the original and correct meaning of the term, is an increase in the money supply. Such inflation causes increases in prices, often in unpredictable ways. This is not just “inflation”, now redefined as an increase in the price of consumer goods, although it does plenty of this. This type of price increase is part of most western central bank’s stated goals: the ECB’s 2% inflation target and the Fed 2%-ish target. I won’t spend too much time here analysing why paying 2% more per year for rent, petrol or food does anyone any good (it doesn’t). Another stated policy goal of our central banks is to create a wealth effect by boosting asset prices. That’s a nice way of saying that they want to make people spend money they don’t have because of the confidence they get from seeing the prices of their stocks and real estate artificially high. Great policy, genius.
Of course, these asinine policies have the desired effects. Stock market and real estate bubbles cover up a steady decay of the real productive economy. When interest rates are artificially low, people are forced to make investments they would otherwise never make. Hair-brained schemes like $300m meal-kit companies and mortgages for unemployed imprisoned felons get funded. The ultimate and predictable cause of the 2008 crisis was the too-low-for-too-long interest rate policy designed to stimulate the USA out of the dotcom bubble crash (itself the result of central bank stimulus).
Oh and how little we’ve learned. 2008 ushered in an even more ridiculous zero-and-negative-interest-rates-for-a-decade policy. This, obviously, created a massive rise (inflation) in asset prices, leading to a totally predictable crisis coming soon to a newspaper near you. These over-inflated asset prices create wealth disparities that fuel popularity for socialism. They prevent younger and less wealthy individuals from acquiring assets in the first place while benefiting those who already have the assets and a pile of debt. They do this in plain sight, and who do we blame? Speculators. Foreigners. Foreign speculators even more so. Greedy banks and corporations. All the while missing the elephant in the room: the central banks whose “independent” policy actions are the only thing keeping the bubble economy from imploding (yet) and from keeping their sponsor, the government, solvent.
And this is why I say central banks are our biggest problem. Because apart from creating bubbles and panics, apart from preventing failed companies that make bad use of the factors of production from going bankrupt and releasing that capital for new businesses, the central banks enable their biggest fan, the government, to take on mountains of debt and spend gazillions of eurodollars.
If we take away the central bank monopoly, if we return to the relatively recent past where several banks competed to issue currency and boasted about the amount of reserves they had and strength and constancy of their issued notes, we would instantly defang government excess. Where now we have no choice but to use the increasingly worthless currencies spewing forth from profligate central banks, we could choose among the safest, soundest most reputable banks in a market of confidence.
Enabling currency competition will do more than any other policy I can think of to solve our biggest problems. Note, that this will also have to come with an end to bank deposit guarantees to be effective. If the regulators, so obsessed with breaking the free market with “anti-monopoly” regulation would instead focus on our biggest and most problematic monopoly they might not be quite as irritating. And if these central blunderers think they are so clever, think that their degrees and Philips Curves are so grand, why is it that they are so afraid of a little competition?
Bhubaneswar, October 1st 2018
TLDR: Central banks are the biggest problem in our economy
Central banking is a relatively recent innovation. It is not the oldest “central banks”, the Dutch Wisselbank, the Sveriges Riksbank or the Bank of England of the 17th and 18th centuries, but rather that same Bank of England’s 1844 monopoly charter that started the idea that a nation can and should have only one currency issued by only one bank. This monopoly on the supply of money is at the heart of the problem with central banks.
The other main problem, is the usual hubris that comes along with central bureaucracy, the idea that some genius can concoct a better outcome than the market. Always use the right tool for the job. A hammer is the right tool for any job and anything can be used as a hammer. The central bank has two related tools at its disposal: interest rates and money printing. And boy, do they use them!
Without any competing banks to issue any competing currencies and with the law enforcing the payment of debts, display of prices and the settlement of all contracts and taxes to be in the monopoly central-bank issued currency, the amount of money issued by the central bank (mostly done only digitally) and the amount of interest it charges commercial banks for money advances have an enormous impact on the economy and society at large.
The central bank’s tool is in a sense just one: inflation. Inflation in the original and correct meaning of the term, is an increase in the money supply. Such inflation causes increases in prices, often in unpredictable ways. This is not just “inflation”, now redefined as an increase in the price of consumer goods, although it does plenty of this. This type of price increase is part of most western central bank’s stated goals: the ECB’s 2% inflation target and the Fed 2%-ish target. I won’t spend too much time here analysing why paying 2% more per year for rent, petrol or food does anyone any good (it doesn’t). Another stated policy goal of our central banks is to create a wealth effect by boosting asset prices. That’s a nice way of saying that they want to make people spend money they don’t have because of the confidence they get from seeing the prices of their stocks and real estate artificially high. Great policy, genius.
Of course, these asinine policies have the desired effects. Stock market and real estate bubbles cover up a steady decay of the real productive economy. When interest rates are artificially low, people are forced to make investments they would otherwise never make. Hair-brained schemes like $300m meal-kit companies and mortgages for unemployed imprisoned felons get funded. The ultimate and predictable cause of the 2008 crisis was the too-low-for-too-long interest rate policy designed to stimulate the USA out of the dotcom bubble crash (itself the result of central bank stimulus).
Oh and how little we’ve learned. 2008 ushered in an even more ridiculous zero-and-negative-interest-rates-for-a-decade policy. This, obviously, created a massive rise (inflation) in asset prices, leading to a totally predictable crisis coming soon to a newspaper near you. These over-inflated asset prices create wealth disparities that fuel popularity for socialism. They prevent younger and less wealthy individuals from acquiring assets in the first place while benefiting those who already have the assets and a pile of debt. They do this in plain sight, and who do we blame? Speculators. Foreigners. Foreign speculators even more so. Greedy banks and corporations. All the while missing the elephant in the room: the central banks whose “independent” policy actions are the only thing keeping the bubble economy from imploding (yet) and from keeping their sponsor, the government, solvent.
And this is why I say central banks are our biggest problem. Because apart from creating bubbles and panics, apart from preventing failed companies that make bad use of the factors of production from going bankrupt and releasing that capital for new businesses, the central banks enable their biggest fan, the government, to take on mountains of debt and spend gazillions of eurodollars.
If we take away the central bank monopoly, if we return to the relatively recent past where several banks competed to issue currency and boasted about the amount of reserves they had and strength and constancy of their issued notes, we would instantly defang government excess. Where now we have no choice but to use the increasingly worthless currencies spewing forth from profligate central banks, we could choose among the safest, soundest most reputable banks in a market of confidence.
Enabling currency competition will do more than any other policy I can think of to solve our biggest problems. Note, that this will also have to come with an end to bank deposit guarantees to be effective. If the regulators, so obsessed with breaking the free market with “anti-monopoly” regulation would instead focus on our biggest and most problematic monopoly they might not be quite as irritating. And if these central blunderers think they are so clever, think that their degrees and Philips Curves are so grand, why is it that they are so afraid of a little competition?
Bhubaneswar, October 1st 2018
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| Alas, nobody is still alive to remember what could be accomplished without a central bank |
TLDR: Central banks are the biggest problem in our economy
