I cannot help thinking that the rush to reduce interest rates by the Fed in
the US, the Bank of England and the European Bank (and several more central
banks) in the hope of re-igniting the recession is pushing on string and
that interest rates will end up at around zero. This has already been the
case in Japan for several years and has done nothing to regenerate economic
growth. I fear that the same will happen in the remainder of the western
developed world.
On the face of it, the situation between Japan and the others is different.
Japan's main problem is that their banks are stuffed full of grossly
over-valued assets and are technically bankrupt (rather like many American
banks during the Great Depression of the 30s). They dare not reveal the
full extent of their liabilities and, so far, the Japanese Government is
not courageous enough to insist on full disclosure.
In the West, however, the problem is more subtle. It's much to do with what
is called Goodhart's Law. Strictly speaking it isn't a "law", or an attempt
at one, but merely an observation. Prof Goodhart (in his retirement, not
during his term as chief economic adviser at the Bank of England!)
suggested some years ago that any measure of the money supply behaves
differently when it becomes an official target by the very act of targeting
it. (It's actually rather like Heisenberg's Uncertainly Principle in
physics -- that the very act of measuring a sub-atomic event causes a
change in it so that one can never know what the situation was before the
observation, never mind afterwards.)
The latest fashionable theory of central banks is that the money supply,
inflation and, hopefully, employment, can be regulated by the interest
rate. Now that governments/central banks are concentrating their minds on
this alone I cannot help thinking that there are sufficient signs already
that it's not working.
Perhaps this will stimulate some economists to enquire more deeply about
the real nature of what has been the subject of so many Keynesian and
monetary theories in recent decades -- that is, money itself. Perhaps they
will come to the conclusion that money should be restored to having real
value -- instead of being, what is in effect, a paper token whose validity
is sustained only by governmental say-so and the unthinking compliance of
those who use it, or who can speculate against one currency or another for
profit.
At the present time, all large banks have derivative funds which are
supposed to be assets but whose true values they refuse to disclose. Basel
2 is failing at the present time to insist on being able to measure these
(as counting towards the credibility of a bank) but even if it succeeds in
the coming months/years, we can be sure that banks and other financial
bodies will find new ways of disguising their real state of affairs. At
present, if large banks fail then governments (that means all of us who pay
taxes or buy goods) have to save them and pick up the bill because it's the
whole government-issued money system that has to be protected.
However, if, and I believe when, banks are allowed once again to issue
their own currencies then they will have to make their accounts fully
transparent. The banks will have no chance of persuading customers,
investors and, above all, financial analysts and journalists, that they
have a chance of guaranteeing the convertibility of their currencies unless
they do so.
Until recently the restoration of real-value currencies rather than
national currencies was considered ridiculous. But I've noticed a few
straws in the wind that suggest that this might start to be discussed much
more seriously in the years to come. Hayek's book, "Denationalisation of
Money", published in 1976 is being mentioned more than ever in various
articles and books I've read recently.
When could sensible value-currencies be restored? Much depends on whether
the earliest interest rate reductions of a year ago have any effect. They
should have have done by now, but if it becomes increasingly apparent in
the coming few months that they're not working then I think that many
economists will question the continuation of the present headlong run of
reductions. Quite rightly, they will start to say: "What if the interest
rate becomes zero and still nothing happens, like Japan? Where do we go
from here?"
And, of course, there's nowhere to go. There are no other wonder theories
doing the rounds. There'll only be one thing to do: to restore money to its
rightful historical place as the meaningful basis on which all economic
transactions depend.
Keith Hudson
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Keith Hudson, General Editor, Calus <http://www.calus.org>
6 Upper Camden Place, Bath BA1 5HX, England
Tel: +44 1225 312622; Fax: +44 1225 447727;
mailto:[EMAIL PROTECTED]
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