Powerless

Quantitative easing seemed like a good idea in the face of a financial system meltdown in 2008/2009. Banks had fooled themselves that they could manage the risk around the securitization of home loans, but when the market collapsed there simply was not enough time to react.

Since the beginning of time supply and demand has devalued that which is in over- supply and increased the value of that which is in short-supply. Today, due to quantitative easing the thing in most over-supply is money.  The effect of this over-supply is that money now has a value of 0%.

Economist Milton Friedman popularized the idea that a nation’s money supply could be used to control demand and therefore inflation. By restricting money supply growth with interest rates inflation could be kept in check and money would have a value.  This was a careful process that fine-tuned the economy and it worked for more than 30 years.

Today we have a planet awash with money and this has led to the return on money of 0%.  In turn the low cost of house mortgages has led to a property market boom, so housing seems to be key driver is soaking up this excess money.

For business it means that they cannot raise prices and an important indicator is car prices. Despite car-makers putting more into the modern car they are only able to sell them at the same price as a decade ago.

Today the worlds Reserve Banks and stuck in the Milton Friedman era where they are trying to use interest rates to control supply and demand.  Unfortunately today with interest rate at or close to 0% Milton Friedman’s theories are of no use.

We are now in a world where the primary managers of this planets money, the Reserve Banks, have lost complete control – they are powerless.