What Mark Carney should do and why he won't do it
The reason this former Goldman Sachs guy (yes, another one) heading up a central bank will give - is the same reason Ben Bernanke gives - and the Bank of Japan, etc. He’ll say the bank needs to fight ‘deflation.’ And he will also fail to admit that central bank purchasing of government bonds doesn’t fight deflation, it causes deflation.
How Central Bank purchases of government bonds cause deflation.
Bond purchases by central banks to cheapen rates makes funding additional bond issuance by corporations, banks and governments cheap. Look, the UK’s debt continues to climb; so too in America, Japan and Europe. Quantitative Easing (QE) programs have coincided with governments and banks increasing their debt loads to record amounts and debts of course have to be ‘serviced.’ That is to say, the interest payments that are due every quarter have to be paid, on an ever increasing debt pile; and the way this mounting interest cost, (now approaching 25% of government expenses in the aforementioned economies), is paid is to float more debt: made possible by the cheap interest rates guaranteed by the actions of the central banks and their Quantitative Easing programs.
If this toxic feedback loop of tail chasing by the central banks were not a case of deflation-stoking, we would have seen some ‘velocity’ of money in the economy by now - with all the trillions of currency that’s been printed to purchase these debts created by governments (and banks) - but we don’t because the newly printed cash never makes it off the bank’s balance sheets. They hoard the cash to pay the ever increasing interest costs on the ever increasing debt pile.
The increase in debt service and the stagnation of money (that’s not circulating) creates an economic condition called deflation.
If the goal is to increase economic activity (GDP) and increase jobs and wages and savings - the only sound policy decision Mark Carney or any central bank can make at this time is to raise interest rates.
Zombie, cash hoarding banks would fail and no longer clog up the flow of cash from the central banks to the ‘real economy.’ Demand for credit would increase as real returns by companies working outside of the banking sector would increase as the real inflationary impact of higher money velocity hits their income statements. Demand for workers and wages would increase; workers who would be hurrying to spend their money before prices went up again - would feed and propel the whole positive ‘virtuous circle’ forward.
But this won’t happen.
Why won’t the Bank of England raise interest rates even though it’s the best possible policy he could implement right now to get the economy going?
Because the Governor of the BoE serves the vested interest of these same zombie banks who grow rich (without taking any risk whatsoever) at the expense of the real economy. And who can blame them? If there’s no deterrent to committing financial crimes or profiting from rent-seeking, deflationary debt-hoarding enabling by the central bank, why change?
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.