The magic of the interest rate or Central bankers as shepherds of the world's most ecumenical faith
In a lecture, historian Harari aptly notes how much we too are dominated by words, stories and myths these days. These often take a different form than one would expect. Who would have thought, for example, that the greatest storytellers of (un)believable stories are not J. K. Rowling, George Lucas or J. R. R. Tolkien? The greatest storytellers of these stories, Harari says, are central bankers.
They are the ones telling the story that almost everyone on the planet believes. They are the shepherds of the most ecumenical story of all time. George W. Bush and Osama bin Laden believed a great many very different and contradictory myths, but they both believed in the US dollar. Even though each of them reads In God We Trust and it is pretty obvious that they are about God as presented by Christianity, bin Laden was happy to accept them, accept them, collect them, and continue to use them. They each believed in a different god, but they both believed in the dollar.
And what is this belief, this myth? It is that a given printed piece of cotton (American banknotes are not paper) has a value. Or that the magnetic entry on some bank server (where all your savings are) has value. It is the commonly accepted belief that the cotton or paper is not just cotton or paper, but that it has a much greater value socially in the symbol it carries. And that this writing in the bank is not merely the writing of a series of numbers, but that these numbers, these words, have a kind of value which is infinitely greater than the simple writing of the same numbers anywhere else. And this belief - like other beliefs - must be kept alive. And that's what central bankers do.
And what is the story that central bankers tell? It is the story of a stable currency that can be trusted, because without trust, or outright faith, money cannot exist. And the concern of central bankers, the priests and shepherds of the economy, is precisely to tell a story about a stable currency that can be trusted. Today, tomorrow, a year from now, a decade from now.
Sure, they have different tools to do this, but the point of all these tools is to keep the story alive. And the main such tool is central bank interest rates. These determine at what interest rate commercial banks will deposit their spare money with the central bank, which will issue them a security in return. This will slow down the circulation of money a little bit, there will be less money in circulation, and so there will not be as much upward pressure on prices, which is what the central bank is supposed to be looking at in the first place.
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In all this, it should not escape us that, again, interest rates are just a word. And that word will come from the council of the wise, the central bank board. The Board of Wise Men is deliberating, arguing, arguing now this graph, now that graph, now one principle, now another model, now Friedman, now Keynes, now Hayek, now recent experience, now ancient history. Well, at the end they somehow agree on the word "seven". And according to this word, they start building less in the South Town or in Pelh?imov. But at the beginning of that great chain was a word.
The interest rate is a suspicious thing and always has been. All the old records that we have from the Code of Hammurabi through the Vedas, the Old Testament, Aristotle, the Qur'an - they all deal with interest rates and they all somehow don't know how to deal with them and prefer to restrict or prohibit them in various ways. Even Aristotle, the king of logic, uses theological arguments (!) to justify his opposition to interest. Interest was a suspicious animal because it behaves strangely and our ancestors did not understand it. They took them as a subset of ethics and advised not to ride this animal too much. We have made interest rates the center of the financial world.
Today, we can safely say that we do not understand interest rates properly either, we can manipulate the energy in society and the power of money with them, but even the central bankers, the experts in the word, do not understand interest rates at all. Central banks often overshoot interest rates, often overreact and often trigger economic cycles through their actions - just look at the history of interest rates and how many times they have had to be radically cut again after a sharp rise. Not every time, because there is no one-size-fits-all rule. If the central bankers succeed this time - especially after such a long period of zero interest rates and with all the uncertainties of the current geopolitical situation - it would be a minor miracle.
We can only hope that this miracle actually happens and that central banks do not overdo it by tightening interest rates. A financial crisis and a deeper economic slump than the current one is not really needed in a West immersed in war and many other problems.