2016 Politics and Central Banks

2016 Politics and Central Banks

2016 has brought into focus politics and central banks simultaneously. The 2016 U.S. presidential primary campaign is unprecedented, according to many of the pundits, and central banks in Europe and Japan are experimenting with negative interest rates. The February 20 issue of The Economist raises the question of whether or not central banks are out of ammunition. Because economic recoveries from the 2008/2009 collapse are weak and inflation is low, the concern arises whether central bank actions work at all.

The Economist points out that central banks are not designed to do all the work. Central banks control monetary policy, which relates to money supply, inflation targets, and interest rates. Monetary policy has a sister named fiscal policy, which is the responsibility of governments (politicians) who control government spending and tax rates. Currently, central banks are doing all the work, and politicians are not carrying their weight. Fiscal and monetary policies can be very effective when they work together.

With borrowing costs at historic lows, U.S. politicians need to have the guts to lock in low interest rates and borrow to build strategic infrastructure, create jobs, and increase public asset values through investment. Central banks have had to act because politicians are weak and incapable. Politicians need to work together on comprehensive tax reform and productive, job-creating deficit spending. The national debt is not so onerous when long-term interest rates can be locked in at 2% to 3%. Not only is it not onerous, it is opportunistic.

TRIP, an American transport think tank, estimates that potholed roads in 25 American cities cost more than $700 annually per vehicle. This largely defeats the benefit of low gas prices that are saving U.S. households at least $1,000 per year. Partisan mud-slinging has rendered the U.S. government ineffective, which is why this presidential primary season is so bizarre and alarming.

Australia is experimenting with selling nautical ports and airports to private interests and using the money for other infrastructure improvements, creating jobs and improving asset values. One result is that the privately-run ports and airports are much improved, more productive, and more profitable.

Politicians in the U.S. and abroad need to engage in constructive actions with central banks, reform taxes, and invest in infrastructure. If the current partisan conflict and timidity continues, we may experience a devolution into fascism.

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