Mark Spitznagel has a short op-ed in the Wall Street Journal where he illustrates the disastrous effects of central planning through monetary policy. The actions of the Federal Reserve have only allowed bad investments to persist and to postpone inevitable corrections necessary in the capital structure of the economy.
Herein are pearls of great wisdom for central bankers today. Central banks are creating a tinderbox by keeping alive many very bad investments, fertilizing them with everything from artificially low interest rates to preferential liquidity to outright securities purchases. As these institutions and instruments overrun the financial landscape, they hamper the economic ecosystem and perpetuate the environment of low growth and high unemployment in which we currently find ourselves.
Unfortunately, a policy stance that sees naturally occurring catastrophes as part of the process of economic growth is not just an “insurmountable cognitive challenge”. Non-intervention is incompatible with political interests. Central banking has become the new central planning, with virtually unconstrained discretionary power. To avoid the disastrous effects of monetary policy, it would have to be eliminated entirely.
The free issue of competitive currencies would produce an completely different economic landscape than what we have now. According to Hayek, under a free-enterprise system “what is known today as monetary policy would neither be needed nor even possible.” Banks would issue their own private currency guided only by the profit motive. With no lender of last resort, moral hazard problems that plague our current system would be substituted by competition and responsibility.
Issuers private currency would seek to “make as large as possible the aggregate value of their currency that the public was prepared to hold at the given value of the unit. If we are right that, being able to choose, the public would prefer a currency whose purchasing power it could expect to be stable, this would provide a better currency and secure more stable business conditions than have ever existed before” (pg. 102).
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