I would like to know if the interference of the Central Bank is considered bad for the economy by the Austrian School Of Economics because there are some signs that seem to indicate, at least to me, that it is not entirely true: firstly, in the case of China, the Central Bank with its stimulus package is, or at least widely credited to be, beneficial to its economy, preventing the financial crisis from hitting them too severely; secondly, almost every nation has a Central Bank. It seems that rather than being bad by itself, a Central Bank is bad when it pursues a bad economic policy.
Yes, it’s bad no matter what. Central banks make policy but there shouldn’t be a policy in the first place. Better or worse, it’s still worse than no policy. For a central bank, doing what’s right means doing nothing and prohibiting nothing; even in that case, it’s still bad to have an institution which eats money without doing anything productive.
And central banks are relatively recent beasts. It’s not like they’ve been always here. We can do better without them.
Central banks are not a natural invention of the free-markets, therefore, any & all of them are bad, and can only be considered “less bad” if one adopts a “lesser of evils” approach (aka slippery slope) regarding assorted policies of various central banks. The Lesser of evils has not exactly been humanities brightest doctrine in the bunch, either.
Saying a Central Bank is bad only when it pursues a bad economic policy assumes that Central Banking itself is inherently neutral, which isn’t terribly true when central banks have such grand inflationary tools at their disposal.
I apologize for responding with essentially an objection, although I’d imagine others can provide you with more detailed responses.
But what if you have a huge foreign reserve like China? Is the Chinese stimulus plan really bad?
Any “stimulus” provided by a central bank will only be temporary, and in the long run, destructive. The central bank’s primary function is to expand the money supply. When it does so, it artificially and temporarily lowers the interest rate, which leads producers to think that the public has a high savings-to-consumption ratio which will be represented by the interest rate staying low. So they invest more heavily in labor and capital goods. But the savings-to-consumption ratio never really changed: it only looked like it did, due to the pumping in of extra money into one sector of the economy, and the lag there always is before it percolates to other sectors: especially labor: because those workers whose wages had been bid up due to the increase in labor investment go out and spend their extra money, bringing the savings-to-consumption ratio back down to normal, and thereby raising the interest rate back up to normal. Producers find that they can no longer afford all these new investments, so the boom becomes a bust as bad investments get liquidated. The bust will happen as soon as the monetary expansion stops, which must eventually happen, else hyperinflation will result.
The above is a summary of (at least my understanding of) the Austrian theory of the business cycle: and it’s the only sound economic theory that explains the astoundingly clustered nature of entrepreneurial error of bubbles and the fact that bubbles are almost always worse in the capital goods sectors of the economy than in the consumer’s goods sectors.
In the case of China, wouldn’t the government funding help every sector of the economy in the long run by creating roads and new infrastructure that will effectively expand the economy? Also wouldn’t it prevent deflation and restore confidence among the Chinese population, which is known to have an overly high saving ratio, thus helping maintaining general consumption? And wouldn’t it also insure political stability in the country, which would save the country from a disaster and benefit the economy?
In the case of U.S., I would agree because the interest rate was way too low, but in the case of China, it seems to be completely different.
The money for all that infrastructure has to come from the people themselves, either through regular taxation or the inflation tax. Of course the infrastructure will be used, but will it be as useful to society as what the money would be spent on or saved for otherwise? The answer is no, because resources are more intelligently allocated by markets than by bureaucrats. There are two definitions of the word deflation: 1) monetary contraction 2) price decreases. #1 is good because it corrects the imbalances caused by inflation. #2 is good because it’s the one saving grace of a depression. Imagine how people would have fared during the Great Depression if they were unemployed AND had higher prices to pay. Arbitrary, unpredictable, and repeated government intervention does not restore confidence or political stability. Quite the opposite, it confuses the situation even further.
How would the government finance the creation of roads and infrastructure? by increasing taxes, by increasing debt or by increasing inflation.
Any way the economy suffers.
Overly high saving ratio? according to whom? there is no proper saving ratio, its all based on the preference of each individual to decide how much they want to save and how much they want to consume.
How could you know if rates are to low or to high? without a real market in interest rates there is no possible way of knowing this.
The Chinese government used their foreign reserve in order to finance their stimulus package.
I don’t agree because the private sector cannot finance the building of roads, which is necessary for the expansion of the economy. Although that I would agree that in other activities that are not related to the building of infrastructure the government is generally less efficient than the private sector.
To give an instititution a monopoly on money suppy is inherently flawed, of course its against the austrian school but moreover the power it gives is too much for the government or anyone for that matter.
“Give me control of a nations money supply, and I care not who makes the laws.” -Mayer A. Rothschild.
Those practices are inflationary, they increase the supply of money.
Check this article about the Chinese central bank.
Look at it this way, the state doesn’t produce any wealth by itself, in order to finance its projects it must obtain it from society. Inflation is a way to do that.
Yes it can, actually it already does. http://mises.org/freemarket_detail.aspx?control=202
And even if it couldn’t, that is not an argument in favor of central banks.
good point corporate and nice choice of articles.
Central banks are always bad. They have a tendency to inflate (bad), which is a tax worse than the others, primarily because it is less obvious. It also has a tendency to price out the poorest, but it becomes obvious that most mixed-economy measures intended to benefit “the poor” actually make large sections of them worse off. But this is off point. Central Bank has more pernicious effects, creating ex nihilo the business cycle, (which they blame on the “free market”, thereby allowing them to sponsor further extension of government control), which distorts price relations (it has been shown that any amount of money is a sufficient amount in an economy, and if Central Banks proceeded by the way of Hume’s “Angel Gabriel” model, there would be no business cycle, just massive rises in prices). This brings an artificial lengthening of the nation’s capital stock, due to the belief that savings have increased (due to the lowering in the effective interest rates), which eventually reveals itself in the bust. It would be better for you to read a more comprehensive account of the role of Central Banking (e.g. Rothbard - The Case Against the Fed, or Rothbard - The Mystery of Banking).
In the event of this bust there may be a contraction in the money supply - deflation. Central Banks may try and prevent this through printing more money, but this would only postpone (and increase the eventual severity of) the bust. Deflation however, isn’t necessarily bad (see Hülsmann - Deflation and Liberty), and is generally better than inflation which benefits the government at the expensive of the citizenry. Deflation usually lessens government’s hold on the economy/country.
Says who? Walter Block has shown otherwise. Or do you honestly buy into that self-serving public goods crap government ideologues spew?