Sep 23, 2022
Central Bank Madness
The “cost of living is hurting the economy”, so let’s increase the cost. This is the Keynesian thinking that is thumped into the heads of central bankers from the day they sat in their first economics class.
To give them some credit, they probably didn’t know back then that they would be central bankers. They still had to be dumbed down before reaching that low level of ambition.
But, of course, a central banker is a politician. The pressure to do something will always outweigh doing the right thing or simply doing nothing.
A central banker will always follow the herd. That means they all think the same way, and when one of them says it’s time to raise rates, they will all do the same.
The theory that central bankers follow is that increasing the cost of debt by raising interest rates will reduce the amount of money in circulation.
Less money in the economy to buy goods and services, thus reducing demand, will pressure producers to supply less or lower prices.
In theory, lower prices or slower price increases will reduce inflation.
This theory is based on the original definition of inflation. As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Our wunch of central bankers (wunch is not a typo, it is the collective noun for a group of bankers) don’t even know the correct definition of inflation.
Increasing the cost of debt is not going to reduce the fuel price. Increasing the cost of debt will not reduce the exponential increases in energy costs due to Eskom’s incompetence in powering our economy.
In South Africa, we need to be encouraging investment. Our GDP growth is pitiful. We don’t have anything that resembles an “overheated” economy with too much money chasing too few goods. We have the complete opposite.
A wunch of bankers is entirely appropriate. One might mix up some letters and think of them more as a bunch.
Justin Spencer-Young
