June 12, 2023

There is a growing rift between mainstream academic economists and the business community. This does not happen very often given that academic economists are supposed to be trained to support business. The new rift is around interest rates and what they should do.

It is a strange debate. Central bank rates are at best marginally related to inflation. Sure, if you put them way down, they lead to bubbles in the economy like we experienced over the previous decade (or 50 years depending on how far back you want to go). Put the bank rates too high and they will destroy the economy. But, this is hardly a fine-tuned instrument to play the inflation game with. (Like building a music venue or dismantling affects some music playing, but it isn't really how one affects how much music is being played.)

The business (and private banking) community's growing division with the central bank is driven by their confusion that the central bank is supposed to work for them, but is currently acting to put many of them out of business.

This is a misunderstanding on top of a mythology. The mythology is that the central bank is "independent" of the state with the assumption that it works for the private banking system. The misunderstanding is that this means that the central banks operate for the benefit of all companies.

The misunderstood mythology has lead to underestimation of just how far the central banks will go to destroy a significant chunk of the economy.

The reality is that the central bank is only partially independent of the state. Many central banks exist on a spectrum of independence. This connection to the state is because of its public mandate: to maintain capitalism, not as the business community would have it to protect their capital.

The division is making it hard for central bankers to destroy the economy. There is politics at play and therefore people are getting mad their jobs, their capital, their livelihoods are being destroyed. And, so central bankers are starting to not walk in complete lock-step around the world.

Canada just increased its bank rate as it feels it is still subsidizing private bank profits from lending money. USA may follow-suit, but the central banks in the rest of the world is becoming a little more cautious.

This creates a problem. Central bank rates do not exist "in one country". Capital is international and it will flow into countries where rates and policies are aligned to give capital more of what they want: profits. If profits are going to be higher because lending and investing is being subsidized, that's where capital will flow.

So, if real rates are higher in one country than others (say, Canada) and the government is hesitant in supporting massive investments (say, Canada) and politicians are stuck in an old 1990s investment mindset (yeah, Canada) and capital is getting annoyed at an oblivious bureaucracy (yes, the entire Canadian political state apparatus), then that country is going to lose-out to productive investment. This losing out is for both public and private productive investment.

All the above needs to be put in the context that classical economists do not think that inflation will be dealt with this way anyway. The only way to deal with inflation is to have more investment in productive capacity, not less. More employment, not less. More local production of needed things, certainly not restricting those things.

Inflation is the result of too much tension from supply of money, under-production, loss of capital investment, and long-term unemployment. It is not simply a supply or demand problem and it certainly isn't simply a monetary policy issue.

We need to transition to a new green, pro-worker economy. We have a huge task in front of us as a species.

The current actions of the central bank and their interest rate debate is undermining the species' very survival.

But, we already knew that.