Central bank “medicine” has come at a huge cost, writes Peter Lyons.
Houses have become speculative financial assets rather than places for people to live in A thin-skinned, self-absorbed, belligerent man at the helm of the world’s most powerful democracy. Extreme right wing political power re-emerging in Germany. Obvious signs of devastating climate change around the world. We are living in very strange times.
But one of the strangest aspects of our current reality is seldom commented upon. It is an elephant in the room. Our economy, like many around the world , is still hooked up to a life support system. Our Reserve Bank is still keeping interest rates at record low levels to keep the economy in apparent rude good health. We have become so used to this medicine it is seldom commented upon. What is also never mentioned is the irony that, in a market economy, the price of money is largely determined by a government-appointed authority rather than the market. A strange peculiarity of modern capitalism.
I find the role of money and credit in an economy fascinating. It is the lubricant for the economic engine. If this lubricant dries up then the entire economic engine will seize up. We came very close to this a decade ago. Yet this lubricant is so poorly understood. I am a monetarist bore. I spend much solitary time in the kitchen at parties.
Yet a little understanding in this area goes a long way to understanding our current strange economy. In 2008 the world economy narrowly dodged Armageddon. There were strong parallels with the onset of the Great Depression of the 1930s. There was potential for a complete collapse of the financial system around the world. Central banks saved the day. They flooded their economies with easy money. They slashed interest rates. Some gave computer-generated money to shaky banks and governments in return for IOUs. Central banks entered a Faustian pact which favoured the threat of hyperinflation over a descent into the…