Thursday, May 31, 2007

Monetary Policy and Inflation (10) Distorted Growth

An economy cannot grow too fast, but monetary policy can distort growth by causing parts of the economy to grow too fast. The dotcom boom and the current housing boom are good examples of economic distortions fostered by monetary policy. Without loose monetary policy, the speculation in housing or Dotcom businesses would have died quickly as supply and demand responded to prices.

The dotcom sector and the housing sector did grow too fast, but these distortions only occurred because central bankers put their foot on the accelerator at the wrong time. Now they want to take their foot of the accelerator, but disrupting the entire economy does not make sense.
Monetary policy does distort the economy. Worse still, monetary policy cannot eliminate the distortions it creates. The best that central bankers can do is create a different distortion, so allowing them to “correct” an economy that has been distorted by their mistakes is totally foolish. Punishing exporters to control a housing boom is unwise.

Economic growth does not cause inflation. Inflation of the currency causes economic distortions that disrupt the economy.

Most of the time, central bankers are taking actions to fix up problems caused by their own mistakes. Allowing them to slow the entire the economy to eliminate a problem they have caused is like giving the key of your house to the pickpocket who stole your watch.

2 comments:

Anders Arnerlöf said...

Hi BE,
Very good and well written series of posts regarding Monetary Policy and Inflation. I read with high interest.

I'm Swedish but currently living in KL, Malaysia. I read the the interest rates in NZ for home loans are about 9%, what and when was the lowest interste point (approximately)?

In Sweden thay are at about 4-5% but increasing and I wonder if we are going towards 9% as well.

Just find your blog so I have not yet read your earlier postings but will for sure.

Have a good trip to US, Europe and Canada!

RonMcK said...

They got down under 7 percent.