moneyThere has been a material change in the role of monetary authorities in the industrial countries over the past 30 years.  More and more the Central Bankers of the world are put into the position of being the principal architects of economic activity, relegating elected politicians and their support system to secondary status.   The real tools at their disposal are the money supply and interest rates, but often it is their simple use of words and statements to influence financial markets and investor sentiment that has greatest impact.  This change
has led to the questionable role of today’s monetary authorities in economic policy.

There is a great void of economic thinking and policymaking from the elected politicians themselves.  In essence, these individuals, elected to represent the populace in determining fundamental economic policy, have abrogated that responsibility and, in turn, have foisted it on Central Bankers.  Each week we wait for these Central Bankers to advise us on their thinking about the state of the economy, their view on employment markets, where exchange rates are headed, what direction interest rates are headed and when a move is expected, and so on.  Investment markets respond appropriately based more on sentiment than fact, and volatility ensues.

The challenge with this situation is that too much responsibility for the building of a stable economic system is dependent on too few individuals.  And these are individuals with inherent biases, as one would expect.  Their real responsibility is supposed to be the strict management of monetary policy to accommodate fiscal and employment policy as determined by elected officials.   Instead, they speak at will on their particular economic sentiment which often displays their monetary bias, and in the process have become imbued with a celebrity culture.

So, at one stage we have a Central Banker stating that interest rates are going to rise near term because an economy is stabilizing and is expected to begin growing again (all this despite an absence of inflation, relatively weak employment markets, and tumultuous export markets).  The investment market immediately drops on sentiment and waits . . . and waits.  Months later, no interest rate rise has occurred . . . because no interest rate rise was particularly necessary.  What was the point of a non-elected bureaucrat publicly advising the investment markets of their intended policy in the first place?  It is clear that the error rate in their forecasting of economic performance is significant, yet they seem content in their position of positing an economic policy that may or may not be realized.  This is dangerous to investors and the overall health of an economy.

Greece is, of course,  the extreme example of a possible outcome from such an imbalanced policy-making environment.  Here we have a country taken to the brink of collapse because of unbending monetary policymakers who are intent on preserving the value of a currency backed by deteriorating excess credit.  In the extreme, they ignore the populace and their welfare, egging on the possibility of civil discontent.

The risk is that monetary policy is based principally on issues of confidence that support the value and acceptance of monetary assets, which are only pieces of paper.  The financial collapse of 2008 shows what can happen when that confidence is lost – the monetary system itself collapses, and this can happen on a global scale very quickly.

What is needed is a more balanced responsibility of economic policy making and the communication of such policy.  The position of all players in the economy should be balanced – manufacturers, exporters, workers, as well as monetary policy makers – and a consistent and coherent economic policy developed  by elected officials that makes sense to everyone.  This is what instills confidence to the majority of the population and ensures stable economic growth over the long term.