Interests barring change
Powerful interests benefit from the existence of the money trap. These interests include the state and the monied elite. They benefit, at least in the short to medium term, from official manipulation of money under the present (IT plus CBI) regime – the state from cheap finance, the monied elite from the rise in asset prices, state-financed bank bailouts, and the plasticity, liquidity and ease of leverage afforded by QE etc.
The more desperate the central banks get, the more the risks pile up.
This has perverted the central banks’ policies into engines of instability. Ironically, a monetary regime that purported to anchor long-term price stability and inflation expectations has in effect predisposed investors, asset managers and business leaders to focus on the very short term, and preferably on day-to-day trading. That is where the big money is.
This is not a fault that can be fixed by higher capital requirements or better regulation.
The three key reforms
Nearly four years after publication, it is time for a new look at the policy recommendations put forward in my book:
- While inflation targeting had outlived its usefulness, there was no other realistic framework for central banks – nothing that promised or could promise long-term monetary stability – within a world of flexible exchange rates. Therefore it followed inexorably that a reform of the international monetary system was needed. A return to stable exchange rates would be the only way to reimpose the monetary discipline on governments needed to effect adjustment of payments positions.
- This must be accompanied by a reform of banking and finance. The pre-crisis banking system was morally and functionally bankrupt. I predicted that “too-big-to-fail” banks would be broken up, or subject to such restrictions as to render them unable to perform the important roles of financial intermediaries. The best way to restore responsible finance and an orderly monetary system was through moving to equity-type contracts and an equity-based financial system.
- Money itself should be re-connected to the real economy; hence the concept of relating money to what I called the Ikon – a fixed price of a basket of global equities. The real money supply would rise as prices fell to reflect real global growth.
Given the power of the forces that benefit from the current regime, it is, in retrospect ,not surprising that such needed reforms have not been implemented.
Even so, there are some encouraging signs.
Raghuram Rajan, Governor of the Reserve Bank of India has called for reform to change the mandates of central banks:
“Arguably, what I have in mind will eventually require a new international agreement along the lines of Bretton Woods, and some reinterpretation of the mandates of internationally influential central banks. But we already have a basis for discussion. The IMF’s Article IV states: “In particular, each member shall … avoid manipulating exchange rates or the international monetary system in order to prevent effective balance-of-payments adjustment or to gain unfair competitive advantage over other members…”
“Setting the rules will take time. But the international community has a choice. We can pretend all is well with the global monetary non-system and hope that nothing goes spectacularly wrong. Or we can start building a system fit for the integrated world of the twenty-first century.”
William White continues to use his perch at the OECD to good effect. As somebody who examines the data on economies, and knows how policy makers think, Bill understands what is going on. In my view, he comes closer to the truth than anybody else writing today.
I would suggest to Bill that he considers another explanation – maybe it is complementary to his explanation of what has gone wrong. As mentioned, I feel that the problem is a failure to understand the nature of money.
That leads to the question whether economists are qualified to point the way out of the money trap. I begin to doubt it. Rational expectations and other schools of economics have already come under strong attack from other economists, but I feel we need to go further: is it economics as a discipline that disqualifies its practitioners from understanding? Perhaps subjects such as the nature of money demand training and skills that economists qua economists do not possess.
To conclude, The experiments with monetary policies under flexible exchange rates have reached their natural conclusion.
The only way out in practical terms is via a reform of the international monetary system. The purpose is to uphold society’s interests – the common good of mankind – against sectional interests. But that in turn requires a better understanding of money itself.