05/07/2017 - Alasdair Macleod: International Coordination of Monetary Policies Has Increased The Potential Scale Of The Next Credit Crisis
“This article gets to the heart of why central banks’ monetary policy will never succeed. The fundamental error is to regard economic cycles as originating in the private sector, when they are the consequence of fluctuations in credit .. Monetary inflation transfers wealth from savers and those on fixed incomes to the banking sector’s favored customers. It has become a major cause of increasing disparities between the wealthy and the poor .. The credit cycle is a repetitive boom-and-bust phenomenon. The bust phase is the market’s way of eliminating unsustainable debt, created through credit expansion. If the bust is not allowed to proceed, trouble accumulates for the next credit cycle .. Today, economic distortions from previous credit cycles have accumulated to the point where only a small rise in interest rates will be enough to trigger the next crisis. Consequently, central banks have very little room for manoeuver for dealing with future price inflation .. International coordination of monetary policies has increased the potential scale of the next credit crisis, and not contained it as the central banks believe .. The unwinding of the massive credit expansion in Greece, Portugal, Italy, Spain and France following the creation of the euro is an additional risk to the global economy .. Central banks should desist from using monetary policy as a management tool for the economy .. An economy that works best is one where sound money permits an increase in purchasing power of that money over time, reflecting the full benefits to consumers of improvements in production and technology. In such an economy, Schumpeter’s process of ‘creative destruction’ takes place on a random basis. Instead, consumers and businesses are corralled into acing herd-like, financed by artificial credit. The creation of the credit cycle forces us all into cyclical behavior that otherwise would not occur.”
