Central Banks’ Rate Cut Policies are Incorrect
Commentary
Discussing monetary policy often brings to light the misunderstanding surrounding the significance of interest rates as reflections of inflation and risk. Interest rates essentially represent the price of risk, and manipulating them downwards can lead to financial bubbles and subsequent crises, while setting them too high can hinder economic growth. In an ideal scenario, interest rates would be determined by market forces without intervention from a central bank. Allowing interest rates and money supply to fluctuate freely would help prevent the formation of bubbles and excessive risk accumulation.
While some argue that central banks merely respond to market demand when setting interest rates, the anticipation and reaction of financial traders to rate decisions suggest otherwise. If central banks truly followed market demand, then letting interest rates float freely would be the logical course of action.
Citizens may perceive raising interest rates during high inflation as harmful, but the real danger lies in having negative real and nominal interest rates. This situation encourages excessive risk-taking and conceals the true extent of debt burdens. The dichotomy of welcoming low rates while lamenting rising asset prices underscores the complexities surrounding monetary policy.
Inflation serves as an advantage for currency issuers by deflecting blame for price increases to various factors while disregarding the role of excessive currency creation and artificially low rates in driving inflation. The blame game extends to banking institutions, masking the true source of economic imbalances.
The responsibility for currency printing and risk concealment rests with entities like the European Central Bank (ECB) and the U.S. Federal Reserve, as they determine money supply through various mechanisms. Central banks do not engage in these practices out of malice but to address unsustainable deficits, public debt burdens, and fiscal imbalances perpetuated by the government. Commercial banks, on the other hand, operate within regulated frameworks and extend loans based on realistic assessments of risk and collateral.
