Ever since the Nixon shock in 1971, loose monetary policy has been the norm. Even though the results have been disastrous, policymakers always insist the alternative is worse. But that could be about to change.
Much of Theresa May’s domestic agenda raises serious cause for concern. But there was one part of her conference speech which was encouraging: she admitted monetary stimulus has caused growing inequality by stoking asset-price inflation – and she said that needed to change.
She’s right. Asset-price inflation transfers wealth from producers to parasites. There’s only one word for it: malinvestment. Misesian monetary theory, it seems, is going mainstream.
But what does the PM’s critique mean in practice? The Bank of England is responsible for interest rates and quantitative easing, and it is independent from the Treasury. Downing Street has already denied any suggestion of changing that arrangement.
Indeed, even if the government could convince the Bank to tighten monetary policy, it wouldn’t be enough by itself to limit asset-price inflation.
A lot of the monetary expansion behind asset-price inflation doesn’t come from central banks, but from retail banks. Fractional reserve banking – whereby only a fraction of demand deposits are available for withdrawal – facilitates vast credit creation, much of which flows straight into the property market.
In fact, banks are encouraged to keep reserves low and lending dangerously high by the safety net of not just emergency central-bank bailouts but also government-backed deposit insurance.
Asset-price inflation happens because banks know they can privatise profits, but socialise losses. If the PM is serious about addressing it, that’s the perverse incentive she needs to end.
Reports suggest the precise change in policy direction will be announced in the Chancellor’s Autumn Statement. After eleven years of listening to Brown, Darling, and Osborne, that might finally be something I look forward to.