In a move that is supposed to fillip economic activity, China’s central bank cut interest rates again. While interest rates in China are not at near zero levels as in the US, the move further signifies that the Bank of China has fully embraced Keynesian economics, which have not stimulated economic activity in the US and in the EU.
In other words, the people at the Bank of China believe–as does seemingly the rest of world’s central bankers–that freshly-printed money is the solution to any and all economic woes.
Ironically, the Chinese government has liberalized import restrictions on gold and silver that have caused the Chinese people to invest in the metals. This is in addition to the gold that the Bank of China is accumulating at the world’s fastest rate.
As was the case in Japan, Europe and the US, the move to looser money resulted in a rising stock market. Newly created money flows first to the financial sectors. In the US, massive money creation resulted in a six-year bull market in stocks.
It is yet to be determined that the quantitative easing programs actually stimulated economic activity. Defenders of QE can only assert that “Things would have been worse if QE had not been employed.”
While the massive money creation in recent years has not yet resulted in higher rates of inflation (at least as measured by government indicators), it will.
Throughout history, when the money supply creation has exceeded economic activity, inflation has risen its ugly head. This time will be no different. It’s only a question of when.
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