Forget covered interest parity, the real debate consuming economics and its role in policy craft is how weak central bank policy instruments remain. The biggest debate in a generation isn’t over interest rate policy, for monetarists never thought interest rates mattered. The grapple over fiscal policies instrumental role in governing civil society has taken center stage. Why? Absolutely no central bank has hit its inflation target and ultra low monetary policy remains the final bulwark propping up essentially weak economies. Unless your a Keynesian, you now know why the Austrian school never thought Keynes settled anything.
Yes, central banks matter more than markets do in deciding how capital is allocated. That matters until it doesn’t. Evidenced in moribund economies around the globe, the maestros of Keynesian kraft cannot publicly claim exhaustion, but they’re done.
Real long term interest rates have been declining for decades, mostly driven by fundamentals like aging populations and the partial integration of savings-rich China into the world economy. Velocity is subpar, yet distortions remain even as diminishing returns remains stalwart; both banks and pension funds suffer, yet the world’s central bankers continue to service their political paymasters. The question is, for how long?
The task is to move beyond reliance on central banks, the political priority is to enlist fiscal policy without entrenching government. The Reaganite policy mix would be the first place to start. Yet its a non-starter. The preeminence of the collective is to blame, but they’ve received cover by major media. Infrastructure is the old canard used in seeking a multiplier, even still, to be effective as a countercyclical tool, timing matters as does debt structure and salesmanship.
Instead, leadership governing central banking sought cover in secular stagnation, weather or a Chinese savings glut to blame for the U.S. current account deficit. Chronic shortfall in demand was justified in circular logic that sought to discern centers of impact outside political control.
In reality, the historical relationship between growth and real short-term interest rates was always poor. Aging populations, demography, debt hangovers, real and imagined canards are no match for the reality these diversions seek to cover. The American economy, for decades, has only sought growth through neo-liberal models of active governance of credit/debt cycles, taxation and depreciation. Its over. And no one has yet devised a way to replace that political cypher.
What has our central bank done? Its monetized the debt to seek velocity. Its bailed out a dominant political class through asset purchases only to push investors into riskier assets. Mull that one over for a minute.
The promise of continuous central bank action is over. Its done.
Time for a supply side revolution. Get ready, for the Keynesians and collectivists who benefited from an ascendant neoliberal model will be lost to acclimate themselves to the wiles of a growing regional based economy launched from an article 5 convention of the States.
Dust off your Hayek, you’re gonna need it.