10th February 2016
The problem with economics
An alternative economic theory
Yet again the Bank of England Monetary Committee has put off raising interest rates. As with past announcements any increase is still 6 to 12 months' in the future and I'm pretty certain that come February 2017 nothing will have change .We will still be talking in the same terms about an expected rate rise. With such an approach one has to ask the question do they know what they are doing. A question shared by many commentators if not their peers. By conventional economic theory the Monetary Committee is doing the right thing, the policy of cheap money should be returning the world's economies to robust growth but the problem is it is not. Equally mysterious is the low rate of inflation.
Can these two phenomena be linked and is it a coincidence that for economies that adopted near zero interest rates, the recession following the 2008 crash has been the most drawn out of modern times? Could it also be a coincidence that Japan applied a similar policy following its crash in the early 1990s with similar consequences? In fact the Japanese economy has never truly recovered and eight years on from the crash and we still seem to be living in its shadow. The Eurozone bumping along the bottom and the British recovery driven by a very unsustainable property bubble. Only in the US is there the confidence to raise rates and that is after a massive quantitative easing program.
To answer my rhetorical questions, no it is not a coincidence that low interest rates lead to low growth. The exact opposite of what conventional economic theory tells us. The explanation as to why modern economic theory is wrong can be found in my book 'An Interesting Theory -Why Interest Rates are Important but not for the Reasons Commonly Assumed'. This shows how a small changes in our understanding of how new money is created and the banks motivation for lending, leads to a model that not explains our current predicament but most other economic conditions as well; from forward guidance to stagflation. It even predicts the good times. The tweak to money creation is interest created money a theme central to this blog and the change to bank's lending motivation is how it deals with this new money.
Now the internet is full of wild claims especially ones that promise to wreak the status quo and it may be tempting to lump these claims in with them. But economics is a subject ripe for revolution as its current track record is not very good at all. Like many revolutionary concepts the theory is quite simple and backed up by data from a variety of sources including the Bank of England, the ONS, the Federal Reserve Bank, the European Central Bank and the World Bank.
To promote the book readers of this blog can download the book for free, for a limited period only, by using the coupon BJ79E on the Smashwords website. You will have to register but there are formats to suit most e-reader devices.comments powered by Disqus