Central bank independence and fiscal responsibility matter, even though the Western world is acting as if these rules no longer apply. Well, perhaps. But the world has given us three examples where the consequences are extreme when these basic foundations of economic policy are ignored or violated.
Is It Really Different This Time? Well, sort of – and that makes all the difference. Interest rates are at zero, and worldwide markets assume that will change little for some time to come. Global coordinated monetary and fiscal policy are spiraling interest rates to this flattened level with little prospect of upward movement. The combination of monetary, fiscal, and interest-rate policy coordinated in this manner is unprecedented and is being pushed to its limits. A subliminal fear may be permeating the markets, generating extreme movements, causing both substantial profits and losses from massive capital flows magnifying price movements within compressed time frames. How do we explain this, and more importantly, how do we predict and profit from it? Bitcoin Explains Everything – Read That Twice If You Need To
Our political system is binary, and both sides are more extreme than reasonable. There seems little patience for the “reasonable middle” where ideas can be nuanced, refined, and complexity of public policy understood. Instead, our leaders are superficial and guide policy with slogans, not thought. People like AOC and Sanders are caricatures, influential yet ignorant and superficial, forming policies while clueless about what it takes to realistically solve even their most critical issues.
They have great ideas on how to distribute wealth but no ideas on how wealth is actually created. Their perspective is to take existing wealth and distribute it to others instead of developing an engine to help more people create wealth. An example of this kind of dysfunctional policy can be found in resource rich African nations. Instead of building industries using the abundant natural resources present as inputs generating real businesses, those resources are simply gathered and distributed – either to efficient businesses in other countries or among governmental cronies to their Swiss bank accounts. Either way, this attitude is disastrous for an economy ultimately. Wealth is created, and policies should free up the ability to create wealth within appropriate legal restrictions.
We are rapidly approaching a zero-interest rate world. In the face of the dramatic negative impact of the pandemic, as well as existing and lingering economic fallout, central banks’ interest rate toolbox will be empty soon. The only remaining weapon will be fiscal policy. Among other things, fiscal policy and domestic financial markets will have an overwhelming influence on global currencies.