The money revolution being perpetrated by the world's central bankers: Don Pittis

This time it's Brexit, but it seems that after every global crisis the solution is the same: create more money. But there are growing signs that central bankers are unintentionally altering the conventional rules of economics and no one really knows where that will take us.

Soaring real estate prices and rising stocks disguise a transformation in the traditional rules of economics

Despite scorn from many in the financial industry, speculators buy gold as a store of value as central banks reduce interest rates below zero, effectively making money free for financial purposes. (Reuters)

The world's central bankers may have started a revolution more radical than anything ever dreamed of by Karl Marx, and it's far from clear where it will all end.

By repeatedly cutting interest rates and buying up bonds, the world's central banks have been gnawing at one of the founding pillars of capitalism, and so far, warnings have fallen on deaf ears. Effectively, central banks are changing the meaning of money and by doing so they are taking us into an unknown, and potentially destabilized, future.

In Canada, the distorting effect of low interest rates has been obvious. On Friday, we learned of another stunning 12-month increase in the price of houses, which rose at the fastest pace since before the financial crisis.

More stimulus needed

Bank of England governor Mark Carney decided not to cut rates last Thursday, but a day later his chief economist Andrew Haldane called for a "package of mutually complementary monetary policy easing measures" to fight off the damaging financial effects of Brexit.
A trader in London reacts after the Brexit vote sent stocks plunging. The chief economist at the Bank of England says that in the wake of Brexit, the British economy is in desperate need of new stimulus, even though after inflation, money is already effectively free. (Russell Boyce/Reuters)

"This monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly, I mean next month," said Haldane.

The world's most powerful central banker, U.S. Fed chair Janet Yellen, has already put rate increases on hold for fear of growing international instability in the wake of the Brexit vote. 

In Japan, fresh from an upper house election win, Prime Minister Shinzo Abe has called for a fresh round of stimulus to counter declining machinery orders.

"We are going to make bold investment into seeds of future growth," said Abe. In the now standard reaction to new government stimulus, stocks shot up on the news.

Pretend growth

The worry expressed by many smart people, including Robert Gordon, author of The Rise and Fall of American Growth, is that real growth has almost stopped. It's been replaced by pretend growth in the form of government fiscal and monetary stimulus.

"We must not assume an easy return to the long-lost era of dynamism," Financial Times associate editor Martin Wolf wrote last week in an article with the bleak title An end to facile optimism about the future. "Meanwhile, the maldistribution of the gains from what growth we have is a growing challenge."
A basic principle of economics is that money has value because there isn't enough to go round, but as governments keep creating more of it, the rules may be starting to change. (Reuters)

Those distortions of maldistribution have been well documented as assets owned by people who can afford assets increase in value faster than wages. 

But there are increasing signs that lower-for-longer interest rates, including the very strange impact of negative interest rates, are having a corroding effect on the very financial system the low rates are supposed to protect.

The latest victims of negative interest rates and the crashing value of bonds are the Italian banks, which until recently boasted of their good health. Even the German giant Deutsche Bank has begun to suffer, at least partly due to low and negative rates.

'Wolf by the ears'

But as we've seen right here at home, the central bankers have — to quote an old expression from the American frontier I spotted the other day — "a wolf by the ears." Letting go would be dangerous.

Even though Canada's chief central banker Stephen Poloz knows low rates are driving up real estate prices in an unhealthy way, raising rates is out of the question. Even while Japanese and European central bankers know their actions may be leading to instability, just as Haldane insisted on Friday, stimulus is the only obvious answer.
Bank of Canada governor Stephen Poloz knows low interest rates are driving up real estate prices in an unhealthy way. (Adrian Wyld/Canadian Press)

The greater the threat to the financial system (Turkish coup, anyone?) the more likely central bankers will propose to create more money.

There is an odd thing going on in global economics right now that's very hard to grasp because it's outside our day-to-day experience, and it's contrary to the founding paradigm of conventional economics: the world's central banks are increasingly making money valueless. 

As I've mentioned before, it may be possible to adapt to a world where capital is free, but if so, the rules must change radically.

Among the conventions of economics, the idea that money is in short supply is near the top of the list. But if the value of money is zero or negative, many of the rules go out the window. 

Free money

If governments produce all the money needed for finance, why should retired people expect interest on their savings? After all, interest is someone paying you for your scarce money. Why pay if it's not scarce?

Far more revolutionary, why should rich people — those who have somehow captured large chunks of money — profit from something that's being created, free, by governments, while so many other citizens get a much lesser benefit?

For those of us raised to believe in conventional economics, the concept is disorienting. My heart beats fast when I try to comprehend it. 

There are strong rumours now that Japan is on the verge of taking one more step over this line, distributing helicopter money free to citizens. 

Or maybe we are moving back to something like a potlatch system, a gift-giving economy practised by Indigenous people in the Pacific Northwest, where the rich gain status by giving away their valuables. 

In fact, the culture may be returning to its roots. Remember the boss of Gravity Payments who increased the salary of all his employees to $70,000 dollars? Well, the employees of the Seattle company announced last week they'd taken up a collection and bought the CEO his dream car, a brand new Tesla.

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Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.