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Insurmountable Dilemma for Central Banks
By B.O.
L'Humanité
Wednesday 30 April 2008
Classical monetary policies are neutralized in the face of stagnation and inflation. Hence the urgent need for radical revisions.
The big countries' monetary issuance institutes are confronted with a terrible dilemma. One of the characteristics of the present crisis is, in fact, to combine stagnation of economic activity with an upsurge in inflation. Now, classically, central banks strive to regulate the system by lowering interest rates to fly to the aid of growth when it falters. Conversely, they increase interest rates when economic activity heats up to avoid an "overheating" that would cause inflation. The problem today is that both phenomena are occurring simultaneously.
Faced with this "stagflation," to use the specialists' jargon, any classical intervention by the monetary authorities appears counterproductive. Should they lower their interest rates, the cheap credit which banks and other big financial operators access first essentially benefits speculators (see below). Should they increase the cost of money, they suffocate growth.
In the United States, the Federal Reserve has opted for a drastic reduction in the cost of money and should reduce its funds rate by another quarter percent today to bring it down to two percent. But this monetary policy on steroids is obviously not succeeding in erasing the threats of recession. Still worse, by inundating the world with dollars, it feeds speculation still further.
In Europe, where the ECB maintains high interest rates (four percent) and even threatens to increase them to "arrest inflationary risks," according to Bank of France Governor Christian Noyer, the signs of a sharp decline in economic activity are ever more tangible.
To escape from the dilemma, it would be necessary to operate a radical revision of monetary policy, which must be far more supple and innovative if it intends to simultaneously benefit real economic activity and fight financial inflation. Communist economists have long advanced the idea of a credit policy based on selective interest rates, i.e. reducing the cost of money for employment-rich investments and useful spending (training, research) and, conversely, increasing rates for purely financial operations to deterrent levels.
The pertinence of this different logic for financing the economy has undoubtedly never appeared with quite so much force as during the crisis of these last few weeks, taking into account the dilemma noted above. It is also a consideration for very broad swathes of the economy, given that it corresponds to the interests of diverse classes of employees, and even those of small and medium-sized company owners, today victims of credit contraction. And it inevitably induces a kind of society in which company democracy, citizen control exercised by the elect, the workers, takes on a totally new dimension.
Translation: Truthout French language editor Leslie Thatcher.
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