To what extent does central banking and the manipulation of interest rates affect the economy? Is it just the inflation that robs us 5% of savings every year or do they hurt us in other ways as well?
In addition to that, do central banks do anything else other than create inflation? From what I’ve learned so far, monetary policy is really just about controlling the money supply, not much else.
I’ve always been of the opinion that the business cycle they cause likely leads to a more tumultuous labor market than would otherwise exist, especially in the areas which are affected the greatest amount. People often worry about losing their job, part of keeping your job is to ensure it’s the result of actual demand as opposed to manufactured demand via easy credit. More and more frequent turnover of employees adds to costs, probably lowers salaries to a certain degree because of the excess job seekers, etc. Can’t be good for those people.
Absolutely. Under the Austrian Business Cycle Theory, ABCT, the artificially low interest rates allow consumers to loan more money than they would otherwise. These consumers spend that money according to their preferences. Entrepreneurs attempting to predict future consumer demand read this behavior by consumers. Then they make investments based upon this demand created by lower than market interest rates. Eventually consumers change their time preferences as one of two things happens: 1. The central bank raises interest rates to keep prices from rising, or 2. Consumers get over extended and can not pay off the debt. (Sound familar: 1-The popping of the dot-com bubble, 2-The popping of the housing bubble.). At that time consumers begin to change their preferences there are entrepreneurs pumping out goods trying to get back their investments. Of course this situation has the usual property that prices rapidly fall as entrepreneurs dump inventory and then go bankrupt and begin to liquidate their now bad investments. This means that the equipment sells for a fraction of what was it was paid for and the employees are let go to find other work.
Of course the employees and equipment for these mal-investments is not ready support activities demanded by the consumers new preferences. So there is a time lag and a lot of unnecessary pain.
And worst part is the lost opportunity cost: The real losses to the economy are much higher than equipment losses and job losses. The real losses are in the investments and activities that entrepreneurs would have made/performed to satisfy real consumer demand. These investments would make all of society better off instead of resulting in idle labor and equipment.
Monetary policy is about more than controlling the money supply. There are political consquences, “who benefits” and “who is harmed”. Simply put, expanding the money supply by a central bank places the economy on an unsustainable track (as Bogart described). Search for “structure of production” on the Mises home page. Have you read this?
From your post, it sounds like you are at the beginning of your journey into sound economics. Mises.org is the right place. Search the forum for reading lists. And keep asking questions.
Central banks are in the business of creating moral hazard, allowing all sorts of institutions to use credit that they don’t really have. The banks can expand the money supply and buy up all the capital in the economy, the government can sell bonds and continue to grow the deficit indefinitely, and this all goes on because everyone expects that the central bank will prevent a crisis.
Imagine that you go to a Casino and bet 1$ on red. Each time black comes up, you double your bet (2$, 4$, …, 32,000$, …) until it turns up red again. This is called the St. Petersburg gambling system.
This strategy works only up to the moment where you get an extremely improbable string of consecutive black events where you can’t double up on your bets. Then you are completely wiped out. (Nassim Taleb calls this a “Black Swan” event.)
What the central bank does is to lend their friends money when that happens, so that as long as they keep playing the system, no matter how crazy the risks they take are, they never lose.
Nice analogy, I like it. Whenever I tried to relate it to gambling I always told people to imagine a bunch of blackjack players, each playing by ‘the rules’ but according to their own risk tolerances on some of the more up in the air hands. Then someone called Government comes in and says, “Don’t worry boys, your wins are yours and your losses are on the house.” At which point even the most conservative of players will start splitting kings occasionally.