How sustainable is our money system? You should probably care.
In most western countries, central banks are, at least in theory, wholly divorced from the political process. Central bankers are selected to terms far longer than that of the average politician—and they are typically allowed to oversee numerous changes in political leadership during their time at the helm—in order to insulate them from the rough and tumble of everyday politics. In theory anyway, the central bank concerns itself purely with inflation rates and monetary policy; fiscal policy, tax rates, and other such matter are left up to the politicians.
At the end of the day, this is about the long term sustainability of a fiat money system. If monetary authorities get into the habit of excessively manipulating the money supply, a fiat money system gradually loses credibility. That loss of credibility was a factor in the inflationary wave of the 1970s, and the greater move toward political independence for central bankers was part of the response.
So what’s wrong? The constant state of financial crisis in which we seem to find ourselves is prompting just the sort of excessive manipulation the money system may not be able to handle long term.
The real worry is that the unconventional measures like quantitative easing that central banks have been using are politically motivated. To put it another way, there is so much pressure on central banks to keep the world economy from collapsing, that the banks have lost all autonomy over their policy. Instead of performing an independent function in economic policy, central bankers have blackmailed by politicians who refuse to take politically costly measures to stabilize the economy. Central bankers are faced with an impossible dilemma: do they let the economy and the financial system collapse, or do they take steps to insulate the economy (and the politicians) from the consequences of poor leadership?
As Mead says, all of this may lead to a crisis of confidence greater than the crisis of confidence in Wall Street or in European (or American) governments. The problem may be with the money system itself. The fiat money system has not been in existence long. In many ways it is still an experiment. The question is, can the West sustain it?
Posted on June 28, 2012, in Banking and Finance, Economy and tagged central banks, fiat money, financial crisis, quantitative easing, Walter Russell Mead. Bookmark the permalink. Comments Off on How sustainable is our money system? You should probably care..