The central banks have backed their economies into a corner

Article, No tapering, no surpriseYesterday, the US Federal Reserve decided not to reduce its money creation programme of $85 billion a month. The Cobden Centre publishes a response, No tapering, no surprise:

It was not too surprising that there is going to be no tapering for some very good reasons. The commencement of tapering would have led deliberately to bond yields rising, triggered by an increase in sales of government bonds to the public and at the same time escalating sales by foreign governments as they attempt to retain control over their own currencies and interest rates. This was the important lesson from floating the rumour of tapering in recent months.

I’ve said many times before, here and in Parliament, that policies of money creation produce an illusion and sow the seeds of a worse crisis later. We’re now in a position where economies are critically dependent on the production of new money out of nothing. Tapering out that policy is bound to reduce the economic activity dependent upon it.

Three things will happen over the coming months and years in some combination dependent on the decisions of central bankers. If they continue present policies and are lucky, they will get away with propping up a bubble economy whose iniquity is bound to promote social and political disharmony. If they go too far, price inflation will emerge and, if people realise in numbers that they will not soon stop printing, accelerate. If the central banks tighten monetary policy, the chaos they have created will emerge once again.

Meanwhile, I’m asked to celebrate the economy turning a corner. Let’s hope I’m wrong and that this time a policy of directing credit expansion into housing will produce sustainable, inclusive and equitable prosperity.

Between where we are and a better way there is an unavoidable correction which is to be feared. My hope is that the public, politicians and economists will realise in time that the source of our difficulties is the well-meaning attempt to manage the economy through widespread intervention by authority, whether monetary or otherwise. Once that happens, we really will have turned a corner.

Why the Cobden Centre? Giving evidence in Parliament, Cobden said, “I hold all idea of regulating the currency to be an absurdity; the very terms of regulating the currency and managing the currency I look upon to be an absurdity; the currency should regulate itself; it must be regulated by the trade and commerce of the world; I would neither allow the Bank of England nor any private banks to have what is called the management of the currency.” Eventually, we will learn that he was right.

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Comments & Responses

2 Responses so far.

  1. Dave Holden says:

    Money/Credit creation is fine if it is used productively, the problem is/was that private sector banks were incentivised to prefer the asset speculation route to profit over more productive uses of their ability to create credit. QE and lower interests rate policies have all been about propping up inflated asset prices while buying time for the serviceability of that over-creation and unproductively used credit.

    As it is it seems to me that this government chose to make public debt the bogeyman rather than recognising that the real problems were and are the incentives and regulation driving the private sector creation of credit.

    Sadly with policies like “help to buy” they seem more interested in restarting a property bubble than rebalancing credit creation along a more sustainable path. This approach may work for the coalitions election prospects but I think it works against a sustainable and balanced UK economy.