The actions by global central banks recently could prove to have a certain profundity in terms of their policy directions. The czars at the helm of these banks are pushing contemporary macro to its limit, especially in the case of the Japanese Central Bank Governor Kuroda. In Kenya, we see the Central Bank Governor pushing his own limits with the interest cap, the moratorium on banking licenses, just to not e a few instances. At the back of his mind, he’s quite cognizant of the primary directive of a central bank, which is to give reins to inflation, thus he will keep printing money until Japan’s CPI elevates beyond its previous 2% target. Few central bankers, according to pundits, are innovating around developing sound, sustainable macrostructures aimed at the ever-elusive phrase 'financial stability'.
Not to mention our own Central Banker, Dr.Patrick Njoroge who has advanced a raft of measures aimed at bringing some semblance of sanity to the banking sector. The law capping lending rates at 4% above CBK-rate, the moratorium of banking license issuance, et cetera are some of them.
It has been increasingly clear for several years on that this government bond-buying QE and ever cheaper money were not just running the risk of having counter-productive effects on consumer spending, but threatening to destabilize finance, including the banking sector. We are living in an over-leveraged society and while it is a truism that more government debt and even inflation can be a solution to the private sector debt problem, it is however fallacious to assimilate that extended private sector debt is the way out in a world where sovereign contagion could mean butterflies and financial tsunamis on the other end of the planet. The austerity regime 'shot itself in the foot' as Eric Lonergan would enunciate in his review, on the face of this fallacy, evidenced by the anemic credit growth despite its diminished cost. So, it begs several questions:
Is the theoretical and empirical basis for lower interest-rates raising robust enough in the face in the wake of countervailing forces? An attempt to answer this question would have us look at Japan and Europe where the higher GDP per capita and relatively even income distributions would have us explore the models based on psychology and math; and possibly deduce that income effects could dominate in lieu of the intended effect of lower rates raising desired savings.
Secondly, did we really need to bear patience until yield curves were flat and short-rates negative to understand that the perpetual attrition of bank bottom-lines was an unlikely rock-solid basis for the indication of cyclical strength? Again, cui bono, who in the end was paying for all those central bank profits? The nascent cognition that flat-yield curves, bond-buying QE, and lower interest rates are the policies of the past. Besides, when all is said and done, marginal utility diminishes ((Lonergan, Routledge, and is, 2016).
And thus it is to be asked in the most intellectual fashion, what next for monetary policy? In a world where Economics has a cognitive struggle in elucidating the age-old question of what money was, not to mention the stark contrast between monetary and fiscal policy, it appears that in the modern democracy, the central bank operates in a veil of ignorance.
An even more important question and I believe the chief of them all, is the role of central bank in the age of Bitcoin? With all the macro-events taking place around the world, geopolitical concerns in the Middle East and the Trump Age, demonetization in India and Venezuela, civil war concerns Africa, lastly and definitely not the last, the recent interest rate hike by the Fed. This strengthens the dollar and works against the emerging currencies, but works favorably for the forex pairing between USD/BTC pairing.
Vinny Lingham provides wonderful insights in this regard sighting the growth of Bitcoin during this Negative Interest Rate Policy(NIRP) and the previous rate hike and the expected raise. He notes that once the next rate hike takes place, the emerging markets’ currencies become devalued, which “raises the effective price of Bitcoin for people in those markets, creating more equity value in their bitcoins and driving up demand for more.” He predicts that the price of Bitcoin will go up to $3000 by this year’s end and one of the most interesting things that is happening in this space is Bitcoin appears to be gaining favor in local currency price trading pairs.
With that said, these are interesting times, to watch the unfolding drama that is the Central Bank in the wake of Bitcoin. The eternal dance between Human Nature and Math.
Lonergan, E., Routledge and is, H. (2016) Where next? Monetary policy in a post policy-rate world. Available at: http://www.philosophyofmoney.net/where-next-monetary-policy-in-a-post-policy-rate-world/ (Accessed: 24 January 2017).