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Cruel and Nasty

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Monetary policy is an ugly and cruel fraud.

Economists use the term “monetary policy” to describe the role of central banks (the Reserve Bank here in NZ, the Federal Reserve in the US, and the Bank of England in the UK). Central banks are responsible for managing the supply of money to their economy, including the issue of banknotes and coins. These days the issue of notes and coins is less important, so their main role is controlling the supply of bank money.

In the 1960s and 1970s, most central banks used “reserve ratios” to control the supply of bank money, ie they set the percentage of their loans that the banks had to hold in reserve. They often regulated the amount of lending to different sectors of the economy and operated capital controls to stop money from leaving the country.

In recent decades, they have switched to “inflation targeting” and controlling the supply of money by adjusting the interest rates that banks have to pay for borrowing from the central bank (the Overnight Cash Rate OCR in New Zealand). The central bank adjusts this rate every few months depending on the rate of inflation in the economy. All interest rates in the economy tend to move in the same direction (eg mortgage rates and fixed deposit rates). Economists call this activity “monetary policy”.

In my view, monetary policy is a vicious fraud.

The ugliness of this approach was highlighted here in New Zealand yesterday, when a few economists suggested that the Reserve Bank needs 50,000 people to become unemployed to bring inflation under control (the Governor of the Reserve Bank will not say this openly). This is barbaric. To control inflation, 50,000 people will have to lose their jobs (In the United States and the UK, they will be millions). How is that humane?

What will happen to these people who lose their jobs?

  • The worst affected will be people whose lives are already precarious.

  • Some will get new jobs, but this does not help the inflation problem.

  • The Reserve Bank needs people to permanently lose their jobs.

  • Some will be unemployed for quite some time.

  • Some will get an unemployment benefit, but many will not because they have a spouse who is still employed.

  • Even those who get a benefit will have a significant loss of income, which will set them back in life.

  • Many of these people who lose their jobs will have children.

  • What effect will an unemployed parent have on children in crucial stages of development? No one knows what the long-term effect on these children will be. Some will suffer irreversible harm.

I do not understand how economists can be so blasé about the economic and social effects of Reserve Bank activities. No wonder economics is called a dismal science.

The worst thing is that the 50,000 people who must lose their jobs to eliminate inflation were not responsible for the inflation that the Reserve Bank is worried about. Why should they suffer to solve a problem that they did not cause?

In recent decades, central banks have massively increased the supply of money by keeping interest rates at historically low levels, partly in response to the Global Financial Crisis and Covid. Low interest rates were supported by quantitative easing (buying up government bonds and other debt securities. The central banks claim that they took this action to keep the real economy (factories and shops) where people work from collapsing. However, most of the easy money flowed into the non-productive sectors.

In New Zealand, most of this easy credit flowed into the residential housing market, which benefited wealthy people at the expense of the poor. In the United States and the UK, in addition to residential property, most of the easy money flowed into equity and bond markets. The banking and finance sector made huge profits, and the wealth of the One Percent increased significantly, at a time when ordinary people were struggling economically.

Now, this easy money has flowed out into general inflation, supported by pointless sanctions on many food and energy products, and governments are getting worried.

However, if anyone should pay the price for bringing inflation under control, it should be those who have benefited from it over the past decades, especially the banks who have made excessive profits and the One Percent who have increased their wealth. Only a mean and nasty government agency would throw 50,000 New Zealanders, who are mostly poor, onto the economic scrap heap to correct a problem that benefitted other people.


Source: http://getrad2.blogspot.com/2022/09/cruel-and-nasty.html


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