With Centrally Planned Money, Central Bankers Are Blind

CC via flickr

It is a pity that the money debate has silenced the possibility that no one would have the central power over interest rates at all. Recently, the U.S. Fed celebrated only a hundred years of existence, whereas a central bank was established in the Czech Republic even later. In such a short time, however, these institutions have gained such a position that today we are talking about whether or not to raise interest rates, and we do not think whether anyone should even have such a power. If we want to know whether the Czech National Bank (CNB) has raised rates correctly and in time, we have to ask the following question: Should central bankers have the power to determine the price of money? 

In the Czech Republic, we have gone through four decades of central planning of prices of practically everything. And the result? Either the price has been set too high and surpluses have been accumulated, or too low, and the television in the evening informed the audience about shortages of underwear and toilet paper. What would the price of lingerie be, if it were set just right, we do not know. But we know with certainty that it would be much easier to bet and win the first prize in lotto twice than to hit the equilibrium prices of everything centrally planned.

Nor can we know what a rate of interest would be. It would probably be higher than it is now, so increasing them may be a good idea, but we do not know it for sure and we will never know. We have to believe the best models that try to give central bankers advice on how much and when to move rates. According to one of them, they also managed to increase the rates in the CNB. Did they choose the right model? It is impossible to know it in a centrally planned system.

And it’s not just an academic question. Central bankers have tremendous power, even though they do not go through a standard democratic process. The twentieth century is a history of mistakes that central bankers have committed, sometimes deliberately. And we are witnessing other damages even now. Low rates lower the price of mortgages, through which banks create new money. These are being spent immediately on real estate, so their price is rising. Subsequently, these new money turns to stock markets, which also inflate. People spend more money and raise the prices of everything. Unemployment is decreasing and wages grow. Now, we are at the top of the business cycle. The CNB cuts inflation rates by increasing rates. But whether it should have, we simply cannot know. 

Dominik Stroukal
Liberalni Institute