So, you believe that price controls don’t work? Then why do we have monetary policy? Why is our monetary order ruled over by de facto government bureaucrats? Why do we have a central bank-controlled money supply and a central bank-controlled interest rate?
We know what happens when the government sets the price of energy…
But that’s the exception that proves the rule: people in the UK don’t believe in price controls. We had an experience with them in the 70s that didn’t work out so well. And so we abolished them… most of them.
And yet, our delusions persist beyond energy prices. They dominate the field of our money, too. We have central bankers tweaking the interest rate and the money supply.
Despite opposing price controls, not many people advocate for abolishing the Bank of England…
I’ve never understood the inconsistency of people’s views on this. The consequences, however, are not so hard to grasp.
The problem with central banks driving monetary policy is that they make mistakes. The latest of which is particularly obvious right now, with inflation through the roof.
But what if the underlying problem is not that the central banks have got monetary policy wrong (again) and kept it too loose for too long?
What if the issue is that they interfered with interest rates and monetary policy at all?
For the past few decades, we’ve had one financial crisis after another. An Asian financial crisis which centred on fixed exchange rates. A tech bubble where stock market valuations got out of control. A housing bubble inflated by loose monetary policy. And a European sovereign debt crisis.
Behind all of these debacles were central-bank currency pegs, central-bank interest rates, central-bank backing of property and bond markets, and central banks increasing the money supply.
Each time, central bankers were blamed, or should have been. They engineered booms and busts by keeping monetary policy either too loose or too tight.
Ironically, it was also central bankers who cleaned up the subsequent mess every time… with more of the same policies. More interest-rate manipulation, money printing and pegging.
At some point, I’d have thought investors might have had enough of all this, deciding that having a central bank meddling with the price and quantity of money is just as bad as having a government control the price of… well… anything.
One of the most influential economists of the 20th century, Milton Friedman, decried this problem. His solution was a “rules-based monetary order”, where the money supply and the interest rate were set based on pre-determined rules instead of discretionary monetary policy.
There have been a lot of iterations of this since. Which rule would be best is a heated debate – within the ivory tower.
But none really came to fruition. Bureaucrats don’t like giving up control. After all, how would they be able to trade their own accounts as profitably if they weren’t the ones making the decisions?
So, a rules-based system is out of reach.
If only there were a parallel financial system which was governed by a rules- based order, as Milton Friedman had wanted.
One where the supply of money is predetermined by regulations, and the interest rates that can be earned on money are determined by supply and demand (savers and borrowers).
One that can’t be meddled with by governments, tweaked by central banks and printed into worthlessness by anyone else.
Well, there is…
In partnership with Nigel Farage, my friend and fellow editor Sam Volkering has prepared something for you called “New Money, New Rules”. It explains how our financial system – Sam calls it the “legacy financial system” – could be usurped by one which is vastly superior. And part of that superiority is the absence of government discretion in favour of rules.
And we’re not talking about the kind of rules which government, or anyone else, can change.
I mean, as advocates of the gold standard learned the hard way, relying on rules that can change seems dangerous to me.
The only thing less intelligent than relying on rules that can be changed would be for those who actually write the rules to be caught out by their own legislation.
I mean, how can a person who writes the rules, and who can then change the rules, get fined for breaking the rules?
Idiots. And there are a lot of them, aren’t there?
No, Sam Volkering is talking about a system which uses the type of rules you’ll find in maths and physics. Rules that can’t be challenged. And that’s what makes this monetary system so superior.
Someone once told me that the reason there are so many brilliant mathematicians and physicists in the Soviet Union is because people can’t argue about those two fields in the same dangerously ideological ways that can be applied in fields such as history or economics.
Even Stalin couldn’t have called someone wrong about 2+2=5. Although there is a movement on that matter today, which even Orwell is unlikely to have foreseen. As Dostoyevsky should have said: “Tolerance will reach such a level that intelligent people will be banned from thinking so as not to offend the imbeciles”. But he didn’t, so never mind.
Anyway, all the clever people in the Soviet Union, who didn’t want to go to the Gulag but did want freedom to pursue their brilliance, went into the fields of maths and physics.
Well, the same is happening now, in our financial system. The smartest and most innovative are leaving the “legacy financial system” behind in favour of… this.
But that’s not all that’s changing in the financial world.
Earlier, I mentioned how all our troubles seem to be caused by central banks, who then set about trying to clean up the mess they make.
But there may be something very different about our present crisis.
Central banks can’t stop a pandemic. They can’t print oil. They can’t produce lumber. They can’t source diesel. They can’t float ships. They can’t change the price of food. Yet those markets are in chaos.
Sure, central bankers are almighty in the financial realm. Right now, however, we face crises in realms beyond central banks’ reach.
This means that, for the first time in a long while, we might get a crisis which they can’t fight properly. One which leaves them as powerless as we are when the blackouts hit.
This makes things mighty interesting.
Editor, Fortune & Freedom