Post-Maggie, Post-Monetarist

The time is ripe for free market Conservatives to develop a coherent post-monetarist economic policy

by Douglas Carswell MP on 15 April 2013 12:49

Margaret Thatcher was a monetarist. But the great Lady has been out of office for over 20 years – and monetarism seems out of fashion.

Central bankers might pay lip service to controlling the money supply. In reality, they seem to use monetary policy as a tool to engineer growth much the way Keynesians use fiscal policy.

Just as Keynesians always find it easier to overspend in the downturns than underspend in the upturns, controlling the money supply always seems to end up with low interest rates.

"But low interest rates mean economic success" you say. Not so. Cheap credit is a consequence of economic success, not a cause of it. Forcing down interest rates in order to engineer prosperity actually does more harm than good:

- Low interest rates discourage savings. And without someone else's savings, there is bound to be a future shortage of real credit.

- Low rates encourage overconsumption. Savings are someone's deferred consumption. If we save too little and borrow too much, we are living beyond our means.

- Easy money means lots of shopping malls are built - but fewer factories. Ever wondered why the UK economy needs "rebalancing" in the first place? It's the way we manage the money.

- Credit shortage. Fix the price of something artificially low, and after a brief glut there won't be much more of it. Low interest rates explain why there's not much credit.

- Asset inflation. Defenders of easy money like to point out that despite all the QE and candy floss credit that central bankers conjure up, inflation is low. It's sort of low – but only if you ignore price increases in things like houses. But factor that in, house prices etc., and the pound has got a lot smaller.

- Have home vs. have not got a home. "But easy credit helps people buy houses" you respond. Really? So why is home ownership falling? Easy credit meant house prices have risen to the point that many ordinary folk cannot afford them.

- Worst of all, easy money means malinvestment. With the cost of borrowing so low, folk invest in things that normally they wouldn't invest in. Malinvestment is a little like cholesterol, clogging up the economic arteries. Malinvestment helps explain why despite a falling pound, UK exports have hardly risen, and why, despite an increase in private sector jobs, GDP has increased only marginally.

The time is ripe for free market Conservatives to develop a coherent post-monetarist economic policy.

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