Tuesday, 27 May 2003

Down with central banks

The Scotsman's Bill Jamieson writes about the prospects for deflation and he expects further interest rate cuts in Europe and the US. As I read the article I was tempted to reach for my copy of Human Action by Ludwig Von Mises, but Jamieson had anticipated my reaction:
For a generation of economists and commentators driven by the inflationary crisis of the 1970s into the arms of the Austrian school of economics, this is high heresy. The prime role of central banks was the control of inflation and the very first step was the halting of the printing presses.
Central bankers are apparently concerned that borrowers' debts are no longer being eroded by inflation and people therefore become less willing to borrow and spend. Well, so what, I say. There is no moral reason why borrowers should expect to have their debts reduced by inflation at the expense of lenders. A full reading of the Austrian school of economics shows that central bank created inflation inevitably causes adverse economic distortions and the best way to deal with them is to allow the inevitable corresponding deflation to take place as rapidly as possible. Then economic growth can restart, preferably without a further government-created boom/bust cycle that benefits one section of society at the expense of others.