Central Bank Policies: Unseen Harm to Economy and Living Standards
Central bank monetary policies have been detrimental, exacerbating economic problems instead of resolving them. Comparable to a surgeon worsening a patient's condition through an operation, central banks enact policies that ultimately cause more harm. This article, originally published by the Mises Institute, expresses views that do not necessarily align with those of Peter Schiff or SchiffGold.
Monetary policies enacted by central banks are among the most damaging forms of government intervention. Their negative effects are severe, long-lasting, and often go unnoticed or misunderstood by the general public. Monetary expansion and artificially low interest rates have several significant consequences that adversely affect living standards.
One major impact is price inflation. When the money supply in the economy increases, price inflation tends to follow. This expansion diminishes consumer purchasing power, gradually impoverishing people over time.
Another effect is the enlargement of government. Expansionary monetary policies increase government spending and debt, as central banks purchase government bonds. This results in more resources being diverted to political and bureaucratic luxuries and costly government programs, which are less efficient than free market solutions. Governments, lacking incentives to use resources efficiently, often raise taxes, accrue more debt, or print more money, making everything more expensive than it would be without monetary intervention.
Financial assets also become overpriced. Monetary policy contributes to financial crises and preceding asset bubbles. Artificially low interest rates inflate the present value of corporations' future earnings, driving up stock prices without solid fundamentals. These low rates also encourage debt-financed stock purchases, further inflating prices. Some central banks even hold stocks, artificially boosting demand and prices.
Real estate is similarly affected. Prices inflate due to its long capital structure, misleading businesses into overestimating the availability of saved funds and investing in longer production processes. Overpriced real estate turns homes and commercial properties into investment assets rather than living spaces or business sites, distorting their primary purposes.
Economic inequality is another significant consequence. Loose monetary policies inflate financial assets without proper fundamentals, enriching those with significant assets. The financial market becomes less accessible for average individuals as stocks and bonds become more expensive and risky. This complexity, along with higher fees and minimum investments due to sophisticated financial instruments and regulations, excludes many people from potential wealth gains. Consequently, average people have fewer opportunities to build wealth, leading to greater economic inequality. Housing affordability declines, delaying homeownership and increasing homelessness in major cities.
Finally, artificially low interest rates discourage saving, as returns do not compensate for the time money is unused, leading to higher overall time preferences. People are less willing to save and more likely to spend immediately. Indebtedness rises for consumption rather than productive investments, hindering economic growth and productivity. Inflation encourages immediate spending, and low interest rates make saving less attractive. This high time preference drives people to seek quick, high returns, often through an overpriced stock market fueled by loose monetary policy.
In conclusion, government interventions via central banks are highly destructive yet poorly understood by the public. They pose significant economic problems that are challenging to address, particularly when their damaging effects are not widely recognized. Central banks are at the root of many economic issues.