Saturday, May 6, 2017

Monetary Sedative

The monetary stimulus currently applied to economies throughout the world is in reality a sedative. It makes change less urgent from what it should be, and the consequence of this is that economies that were already in trouble will sink further into trouble over time.

The super low interest rates that monetary stimulus brings signals to an economy that very little change is required. Pushed all the way down to zero percent, the message is that no change is required at all. Money can be had for free, and factories can be run down or abandoned without consequence.

Over time, a policy of monetary stimulus will lead to lower real wages and miss-allocation of resources. In general, money will be diverted away from productive activities that require labor and into speculative activities that require little or no labor.

With very little urgency to do anything, there is little incentive for concrete action. Why hire a person to do productive work if money can be had for free?

Do not expect real wages to go up before interest rates do the same.

No comments:

Post a Comment