It is often discussed how central banks saved the world economy following the 2008 Global Financial Crisis. In reality, monetary policy has created an even larger bubble than that which burst in 2008. But the trend has now been going on for a generation – from the 1980s onwards, every recession has been met by creating an even larger debt bubble. This has been done by cutting interest rates to “stimulate” the economy out of recession, but when they are raised they do not return to where they were. As a consequence, we have lived in an era of chronic credit expansion – money creation through new debt.
Friedrich von Hayek won the Nobel Prize in Economics in 1974 in part for articulating that interest rates, like other prices in a market economy, should be set by the market rather than by central banks. Over the last seventy years, and for thousands of years preceding this, price fixing has failed in every area it has been attempted – from food, to consumer goods to energy. In most developed economies, the last bastion of price fixing is central banks setting interest rates. Soon this will be shown to have failed, with devastating consequences for the global economy as a generation of ever-larger debt bubbles created by ever-lower interest rates and QE unravels. The solution is for interest rates, like other prices, to be set by the market rather than bureaucratic committees at central banks. The transition will be painful but only the market path can lead to lasting prosperity.