The new man at the helm

At the start of July, Mark Carney became the new Governor of the Bank of England. He appears to have taken his job at a time when there is greater optimism regarding the state of the UK economy, which has in turn changed the expectations on how he should guide UK monetary policy. Only time will tell if the optimism is warranted.

What would my recommendation be to Mr Carney? In many respects, the job is an impossible one. If the economy does indeed improve as forecasted, he will be under pressure to raise interest rates and end QE, both of which could burst any nascent bubbles the money spigot caused. If the economy falters, he might just as easily get the blame for not extending QE or lowering rates even further.

Naturally, I don’t expect Carney to fall on his sword and end the 300 year old institution that is paying him a rather handsome salary. What I do find interesting, however, is the advice from Ben Southwood at the Adam Smith Institute, who recommends Carney implements a programme of “NGDP targeting”, instead of the inflation target that is the current focus. He summarises by saying:

In general the road ahead must be one of rules and discipline, not the translucent discretion of nine unelected barons.They must keep demand steady so we can focus on improving the supply capacity of the economy, and so there is no excuse for fiscal stimulus, with all its flaws.

In many respects, this is spot on – the MPC are never going to have all the knowledge on the economy to make the right decisions, and they are not accountable in the slightest. Yet, the solution proposed is still assuming that we can centrally plan the money supply – the key tenet of monetarism. Replacing the supposedly arbitrary plans of Keynesianism and its fiscal stimulus with the apparently more disciplined monetary stimulus of the Monetarists is no solution at all. (Of course, NGDP targeting is perfectly arbitrary – who decides the NGDP rate to target? Shall we choose 3% or 4%? And there’s nothing to stop the target being changed whenever it suits.)

I have never understood why so many believers in the free market abandon these principles when it comes to money. I recognise that the ASI does not have a strict policy position in this area, and the views of the Austrian school are promoted also. But what is so different about money to any other good or service that it becomes a major exception to the workings of the market? For all the radical ideas about legalising trade in human organs, where are the radical ideas about money? The ASI needs to step out of the shadow of Milton Friedman – a great economist and libertarian – but totally flawed in his views on money.

As I explained previously, we don’t need to create new money:

In an economy with a fixed money supply, but increasing goods and services, the purchasing power of money increases – prices fall. No new money is needed to purchase the new goods. What if the population increases? No problem, the new people just trade what they produce in order to earn money, and as there are now more goods being produced, again the purchasing power of money increases – prices fall. Rather than the money supply changing, the value of money changes instead.

From my perspective, arguing about the merits of targeting inflation, employment rates, NGDP, QE and any other system for the central bank to create money is like asking how many angels can dance on the head of a pin. They all fall down in that they share the belief that inflating the money supply is necessary and beneficial to the economy. As the Austrian school tells us, any form of monetary inflation is harmful and will ultimately damage the economy in the long run.

For those who believe in small government and the free market, please question the assumptions surrounding central banking. Do we really need a central bank? If we don’t trust the state with so many things, why do we trust it with money?

Does this sound like an institution that belongs in the free market?

  • it funds the government whilst punishing savers and workers
  • it bailouts failing private enterprises
  • it rests on monopoly privilege
  • it centrally plans prices

Read Mises. Read Hayek. Bin the Bank.

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