Economists, groupthink and dark clouds


The official cash interest rate in Australia is 2.5%pa. According to business press surveys of “leading economists”, most believe that the Reserve Bank of Australia should cut the official rate very shortly. Weak economic growth and rising unemployment worry the economists and their policy response recommendation is to reduce interest rates. We shall find out soon enough if the RBA takes that approach, but if the business press is correct, what is it about these economists that makes them unable to see that if interest rates are already at low levels and economic growth is insipid, then the problem is not likely to be a high interest rate. Can’t they see what happens in other countries where official interest rates have approached zero and it has not spurred economic activity?

So-called leading economists who argue that more artificial credit expansion, in an environment that has already suffered more artificial credit than is reasonable, are firstly demonstrating that they have no clue as to what has caused the mess nor how to get out of it. Secondly, they cling to each other and reinforce their collective group-think views because they have little else to comfort themselves that they know what is going on. This fear on their part and their response to argue for more policy medicine along the same lines that is making the patient sick is leading to ever increasing dark storm clouds looming on the economic horizon.

Artificially holding down interest rates, running the equivalent of printing money programmes and throwing wads of cash on to the streets from helicopters, all the time as interest rates approach the lower bound of zero, represent the final desperate days in central banking. One by one, central banks around the world are losing the fight and yet still striving to stave off the day of reckoning.

There is no easy, painless way to adjust economies back from the current malaise. The day of reckoning can be postponed for a while, but not forever. The longer it is postponed, the harder and more painful the eventual correction will be. Central banks have distorted markets everywhere. Capital has been invested in areas where there is no real consumer demand. Resources have misdirected into projects that exist only because of artificial credit and associated Government subsidy or market control. These projects are redundant – unfortunately, that means many people will suffer as the redundancy is effected. That is the political problem that prevents governments from coming clean with citizens, explaining the reality and allowing the economies to adjust to find the natural balance between saving and consumption.

UPDATE: On February 2nd, a few days after the above post, the RBA did indeed cut the target cash interest rate from 2.5%pa to 2.25%pa.

FURTHER UPDATE: on May 5th, the RBA decided to reduce the target cash rate to 2.0%pa.

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