This article is bang on !
As a monetary tool , Interest Rate control in the hands of Central Banks of countries is fast losing its utility and purpose to tackle inflation and price-levels .
Monetary theory in the last 30 years has been turned upside down. The valve with which Money Flows used to be turned off and on by central bankers is no longer the Interest Rate , the cost of money in an economy.
Money flow today is determined by Debt and Credit policy.
The US Fed announces massive “stimulus” or “quantitative expansion” … which means essentially flooding the economy with cheap debt and credit to arouse “supply side” forces and so-called “animal spirits”. Banking expansion , digitalisation and financial retailing deluges the markets with wave after wave of liquidity. Borrowings and credit off-take are constantly encouraged through policy announcements, prodding and adjustments. The economy is awash with money , money , money … And so much so that even Debt — short and long term — goes around abegging at dirt cheap rates and scanty bond-yield trends.
When the US — the largest economy in the world behaves in a certain way — it sets the standard of behaviour for the rest of the world which trades , transacts and measures all of its own economic activity only in US $ terms. So, it sets off a trend of “competitive monetary easing” throughout the central banks of the world.
Since money — in the form of debt and credit — has no bearing at all to how the economy is functioning , the Economy now is getting increasingly agnostic to it . It matters little to governments and enterprises these days what the height the levels are of its debt and credit on its balance-sheet. The post-tax cost of borrowed capital is either zero or near zero to the governments or enterprises of the world .
So , what then is the net result ?
It is simply this: since money costs virtually nothing in terms of Interest Rate , the purpose it once upon a time served as an inflation-controlling tool is now being served by the supply of money itself ! When supply of capital itself outstrips demand for it , cost of capital becomes simply irrelevant in the equation since inflation and price-stability are no longer determined by cost of capital. The flow of capital itself , as we have seen in these last 30 years, manages and controls inflation quite effectively.
Interest Rate was once the Dog whose tail was Money supply that could be wagged according to policy. But today it’s the tail that wags the dog. It has been dethroned from its preeminent position in monetary economic theory by Debt & Credit.
Interest Rate will soon become an anachronism … a monetary tool whose utility would be more nominal than real.
😇☺️
Sudarshan Madabushi