The Big Problem With Central Banks

Hi Plebs,

Central banks have two key powers that just don't work well together. First, they can create money out of thin air, at no cost. Second, they have to try and keep prices stable - this is called their "price stability mandate."

Having both these powers is a big issue for how the economy is supposed to work. Economies naturally try to find a balance through the price system. But when central banks work to keep prices stable, they mess up this natural process.

To keep prices stable, central banks change how much money is out there. But doing this distorts all prices in the economy. Each time they try for price stability, they reinforce any imbalances that already exist. And they spread incorrect price signals throughout the whole economy. This just leads to more imbalances building up over time.

It's like the economy is constantly trying to find its balance, but the central bank keeps knocking it off track. And those who benefit from the imbalances do so at everyone else's cost. The central bank's efforts for stability actually create more instability overall.

Making It Tougher for Those With Less Money

Central banks distorting prices also makes it harder for poorer folks to get ahead financially. While adding or taking away money both mess up the economy, central banks tend to create more money over time. This causes prices to be artificially high.

These artificially pumped up prices create huge obstacles for those with barely any savings and no assets like homes or investments. As prices for assets get pushed up higher than they should be, buying that first home or investment gets even more out of reach for the non-wealthy. And the higher costs for basics like food and rent hurt those with the least savings the most.

The incorrect price signals sent out by central banks also lead to poor money choices across the whole economy. Those bad decisions end up harming the poor the most, since they don't have any backup funds.

While distorting money hurts everyone over the long run, there are clear winners and losers in the short term. The rich keep getting richer from inflated investment and asset costs. But the poor keep getting poorer from inflated prices for necessities. So the central bank's efforts to keep things stable just drive the money gap between rich and poor wider.

A Stark Example: The 2008 Housing Crisis

Let's look at what the central bank did during the 2008 financial crisis when real estate prices were falling. The economy's price system was simply showing an imbalance in how much people valued real estate. Overall, people were wanting to hold more money instead of real estate. But the actual amount of money and real estate wasn't changing much yet. People's preferences were just shifting, which prices reflect.

Instead of letting the economy find a new balance, the Federal Reserve created a ton of new money. They did this to try to artificially hold up real estate prices from falling further. The people who already owned real estate or worked in that industry benefited the most from this. But it came at the direct expense of those who didn't own real estate.

Think about someone saving up to buy their first home. Just as home prices were finally coming down to more affordable levels, the Fed jumped in and pumped a bunch of new money into the system. This made home prices go back up, putting that first home even further out of reach. The extra benefit went to those who "had" real estate, at the cost of those who "had not" - just like always happens when central banks step in to artificially sustain imbalances.

Cheers, and onwards with Bitcoin