David Beckworth has a good post up on the concept of “Neo-Fisherism” or this idea that sustained low interest rates cause deflation. Of course, most economists would argue the opposite, that low interest rates will eventually cause inflation to rise. In this view, the central bank can just about always steer the future path of the economy through interest rate manipulation.
Naturally, David Beckworth hates this idea because it’s a narrow view of “monetary policy”. In other words, it narrows “monetary policy” down to interest rates rather than what David likes to focus on, which is all the other transmission mechanisms through which monetary policy can work (like expectations, wealth effects, etc). But David’s view is just an extension of this view that Central Banks can steer the economy. So while it’s a more sophisticated view, it is derived from the same general premise of the Central Bank as the key to future economic growth and the primary policy lever.
This is all interesting, but in my view it all just speaks to a bigger flaw in the way we all think about “economics”. And that is our unhealthy obsession with how much power the Central Bank actually has over the economy. Many economists think of the Central Bank as if it’s some sort of omnipotent entity that can steer the economy through any environment. And in doing so we often seem to forget that a Central Bank is merely one powerful entity in a complex dynamic system made up of millions of different parts. And as a result of this view, we tend to see economic models constructed AROUND this world view of the Central Bank as an omnipotent entity. This results in the narrow minded view that leads to things like this concept of “neo-fisherism” or the idea that low interest rates lead to deflation.
I’d like to propose a different perspective. What if, just maybe, the low inflation we’re seeing has nothing to do with interest rates and what the central bank has done and everything to do with forces outside (or at least loosely controlled by) Central Banks? And what if our tendency to focus on this one entity leads to false conclusions and theoretical models that result in a misleading and narrow minded view of the world? In other words, maybe our obsession with Central Banks has resulted in a world view that is simply too narrow minded and inapplicable to what is clearly a dynamical and evolving monetary system?