Page 12 - Forbes - Asia (April 2019)

FACT & COMMENT
“With all thy getting, get understanding”
THE INSOLVENT THINKING
OF CENTRAL BANKERS
BY STEVE FORBES, EDITOR-IN-CHIEF
THE UTTER INTELLECTUAL bank-
ruptcy of most modern economic policy-
makers was starkly displayed when Eu-
ropean Central Bank boss Mario Draghi
recently and unexpectedly announced
that the ECB would be making a new
round of cheap loans to banks this Sep-
tember to help stimulate the Continent’s
sputtering economies.
Despite decades of disappointing data
demonstrating that central banks cannot
guide the pace of economic activity in the
way a thermostat does the temperature of a room, political
and economic leaders still persist in pursuing this fantasy.
The cost in forgone prosperity is immense. Had central
banks and their political masters sought the goal of stable
currencies—and had the U.S. dollar remained fixed to
gold—the material well-being of the world would probably
be double what it is today.
Central bankers and all too many economists can’t
grasp this basic truth: Money is not wealth. Printing a
bunch of dollar bills doesn’t in and of itself create wealth.
It merely means you can use those pieces of paper to pur-
chase a product that someone else has created. The seller
accepts the pieces of paper because he or she can use them
to buy whatever he or she may want, that is, a product or
service someone has created.
Money is a claim not for something specific, such as a
coat, but for anything on sale in the marketplace. It allows
you to exchange your labor or goods for other things you
might want or need. In effect, money is a receipt for the value
of goods and services we produce and may wish to sell.
This is why counterfeiting is illegal. If you print a $100
bill and use it to buy something, you are stealing that
something, because that bogus Benjamin wasn’t the result
of a good that was actually made. When governments
engage in excess money printing, the result is inflation,
which is an invidious stealth tax.
All this is why most of what passes for monetary policy
wisdom these days is vastly more harmful than the cow
flatulence that’s worrying a growing number of Chicken
Little politicians. Central banks and governments do not
create resources. They take resources from the rest of us for
their own purposes. It’s preposterous to think that a new
8 | FORBES ASIA APRIL 2019
round of futile bank stimulus by the ECB
will lead Europe to sustainable growth.
Let’s look at the record. What trig-
gered the great post-WWII boom in
Europe, most particularly in Germany
and Japan, were stable money and sen-
sible taxes. In contrast, Britain lagged,
hobbling itself with a chronically weak
pound and sky-high tax rates, until Mar-
garet Thatcher came along.
The Federal Reserve repeatedly tried
to stimulate the U.S. economy during the
1970s by engaging in “loose money,” and the result was a
generation of terrible inflation and stagnation.
Again, in the early 2000s, prodded by the Treasury De-
partment, our central bank weakened the dollar, which led
to the debacle of 2008–09. After the immediate panic in
the fall of 2008 the Federal Reserve engaged in quantitative
easing, quintupling its portfolio with Treasury bonds and
packages of mortgages. Result: the worst economic recov-
ery from a sharp downturn in American history.
Here’s the rub. Under QE the Fed, in effect, seized
nearly $4 trillion in securities from the private sector. The
combination of this seizure with regulations that made it
extremely expensive for banks to lend to small and new
businesses distorted credit markets and smothered the
economy. Some stimulus!
A few destructive myths must be faced.
• Economies don’t “overheat.” The Fed has no business
trying to curb the economy when it’s growing rapidly. The
only time prosperity should be suspect is when it’s been ar-
tificially engineered by cheapening the dollar, as happened
frequently in the 1970s and again in the years leading up
to the 2008–09 economic train wreck. Otherwise, leave the
markets alone. They will quickly correct any excesses.
• Price controls on the cost of borrowing money don’t
work. Even conservatives seem to buy into the fallacy
that central banks should try to fix the cost of borrowing.
Most economists know rent controls distort the market.
Interest is the “rent” paid to borrow money. Let markets
work instead of central bank planning.
• Monetary policy cannot overcome nonmonetary
structural barriers to economic progress. The biggest of
these barriers are high taxes and excessive regulations.