Due to loose monetary policy (quantitative easing), financial assets appreciate without being supported by proper fundamentals while real estate becomes investment vehicles and the lower income strata are excluded from ownership.<\/p>\r\n\r\n\r\n\r\n
Despite what the conventional narrative about the economy holds, central bank monetary policies are a form of distortive government intervention in the economy. Their consequences are detrimental to economic activity, they last for a very long time and citizens do not perceive them as problems or do not understand the harm they cause. Monetary policy (as expressed in monetary expansion and artificially low interest rates) has five main effects that harm the overall standard of living.<\/p>\r\n\r\n\r\n\r\n
1. Inflation and money supply<\/strong><\/p>\r\n\r\n\r\n\r\n This is the most obvious consequence, and yet, it is widely misunderstood by voters. If the money actually circulating in the economy (ie, the M1 and M2 indices, or for a better perspective, the real money supply) increases, price inflation tends to soar. Expanding the money supply destroys consumer purchasing power and makes people poorer over time.<\/p>\r\n\r\n\r\n\r\n 2.<\/strong> Greater government intervention in the economy<\/strong><\/p>\r\n\r\n\r\n\r\n Government spending and debt are exacerbated by expansionary monetary policies (as central banks buy government bonds that citizens themselves charge in the form of huge budget deficits). More resources go to pay for the lavish lives of politicians and bureaucrats and for government programs that are, at best, more expensive than a free market solution.<\/p>\r\n\r\n\r\n\r\n Governments have no incentive to allocate resources efficiently (since they can simply raise taxes, increase debt, or print money), so anything they do ends up being more expensive than it would be without monetary intervention.<\/p>\r\n\r\n\r\n\r\n 3.<\/strong> Financial assets become overvalued<\/strong><\/p>\r\n\r\n\r\n\r\n Monetary policy is behind the great financial crisis and previous ‘bubbles’ in all kinds of assets such as US mortgages in 2008\/9.<\/p>\r\n\r\n\r\n\r\n The stock market is overvalued because artificially low interest rates inflate the present value of companies’ future earnings, sending their stocks higher without sound fundamentals. Artificially low interest rates also motivate people to go into debt to buy stocks, which irrationally drives up their prices.<\/p>\r\n\r\n\r\n\r\n In addition, some central banks (such as the Bank of Japan and the Swiss National Bank) hold stocks on their balance sheets, which also inflate their prices due to artificial demand.<\/p>\r\n\r\n\r\n\r\n 4.<\/strong> Property prices are also artificially inflated<\/strong><\/p>\r\n\r\n\r\n\r\n Houses and buildings are “higher class” goods because of their very large capital structure. The supply of funds for investment obviously increases and the interest rate decreases. Businessmen, in short, are misled by the credit policies of the banks and believe that the supply of saved capital is greater than it really is.<\/p>\r\n\r\n\r\n\r\n Now, when saved capital increases, entrepreneurs invest in “longer production processes”, that is, the capital structure is lengthened, especially in the “higher orders” that are more distant from the consumer.<\/p>\r\n\r\n\r\n\r\n Overpriced real estate also turns houses, flats and commercial properties into an “off-the-shelf” asset class (to be invested in and, in theory, protected from the very inflation that caused house prices to rise in the first place) rather than houses and flats for living and commercial real estate for financial activities, whether by rental or purchase.<\/p>\r\n\r\n\r\n\r\n Namely, government intervention clearly excludes the lower economic strata from having fixed assets, which would ensure a better standard of living and economic security.<\/p>\r\n\r\n\r\n\r\n 5.<\/strong> Economic Inequality – How It Widens<\/strong><\/p>\r\n\r\n\r\n\r\n This ties into the previous argument. Thanks to loose monetary policy, financial assets appreciate without being supported by proper fundamentals.<\/p>\r\n\r\n\r\n\r\n The richest (those with the most financial assets) get even richer, not because their investments improve the productivity of firms (by providing more or better goods and services), but because their assets are inflated through monetary policy. The financial market is proving to be less accessible to average citizens due to the following factors:<\/p>\r\n\r\n\r\n\r\n Thus, the average citizen has fewer tools to gain financial security at a time when wage incomes are shrinking. And this continues to worsen as long as central banks continue with their current monetary policy.<\/p>\r\n\r\n\r\n\r\n Housing is also becoming less affordable, and average citizens have to sacrifice more (and for much longer) to save for a home. What would have been an attainable goal turns into a long and painful endeavor.<\/p>\r\n\r\n\r\n\r\n This reduced the number of first home buyers and young people were hit hardest But now, even people in their 30s are living with their parents or other relatives. And homelessness is increasing in big cities like Los Angeles, Paris, Athens and Lisbon (both foreigners and Portuguese).<\/p>\r\n\r\n\r\n\r\n A higher time requirement for investment equals less economic growth and more debt.<\/p>\r\n\r\n\r\n\r\n Destruction of savings<\/strong><\/p>\r\n\r\n\r\n\r\n Artificially low interest rates destroy the incentive to save. In many cases, even if inflation is low, the return on savings does not compensate for the time people did not use the money.<\/p>\r\n\r\n\r\n\r\n The time to maturity of the investment increases. People are not willing to wait to spend their money. If there’s no profit, they might as well spend it right away.<\/p>\r\n\r\n\r\n\r\n Debt for consumption<\/strong><\/p>\r\n\r\n\r\n\r\n Debt is also being raised for the purpose of consumption rather than being used for investment that would increase productivity and economic growth. This also causes prices to rise to higher levels because higher productivity tends to lower prices, and this process is at best delayed by lower savings.<\/p>\r\n\r\n\r\n\r\n In other words, governments prevent deflation (which would cause prices to fall over time). Inflation itself also creates an incentive to spend immediately (as purchasing power declines) and artificially low interest rates make money purchases (which would be an easy tool for people to use to direct their savings ) unattractive.<\/p>\r\n\r\n\r\n\r\n And, since time is more pressing in financial choices, most people are not content to preserve their purchasing power (which can sometimes only be achieved by buying gold). They want fast and high performance – this is a dangerous combination.<\/p>\r\n\r\n\r\n\r\n So they head to the stock market, which is overvalued thanks to loose monetary policy. Government interventions through central banks are the most destructive and yet the least understood by most.<\/p>\r\n\r\n\r\n\r\n It’s a complex enough problem to tackle on its own, and even harder to do when people don’t realize the damage that’s happening.<\/p>\r\n\r\n\r\n\r\n Central banks are the source of most of the woes in the economy – contrary to the dominant narrative.<\/p>\r\n","protected":false},"excerpt":{"rendered":" Due to loose monetary policy (quantitative easing), financial assets appreciate without being supported by proper fundamentals while real estate becomes investment vehicles and the lower income strata are excluded from ownership. Despite what the conventional narrative about the economy holds, central bank monetary policies are a form of distortive government intervention in the economy. Their … <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19],"tags":[188,527,44,736,95,114,568,323],"class_list":["post-2142","post","type-post","status-publish","format-standard","hentry","category-economics","tag-bubbles","tag-central-banks","tag-inflation","tag-m2","tag-money-supply","tag-over-indebtedness","tag-real-estate","tag-stocks"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/2142","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/comments?post=2142"}],"version-history":[{"count":2,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/2142\/revisions"}],"predecessor-version":[{"id":2146,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/2142\/revisions\/2146"}],"wp:attachment":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/media?parent=2142"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/categories?post=2142"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/tags?post=2142"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\r\n