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The other doping scandal

Published in Insights, The New Zealand Initiative’s newsletter, 25 January 2013

When cyclist Lance Armstrong finally confessed to Oprah that he won all his Tour de France titles by using a cocktail of banned substances, he received widespread condemnation. Rightly so.

Artificially boosting performance by doping not only gains you an unfair advantage over your competitors; it eventually harms your body. Just think of what anabolic steroids did to many female athletes from Eastern Europe during the Cold War.

If only there was similar outrage over another kind of doping that was currently taking place around the world. The only difference is that this doping does not happen in sports but in monetary policy.

Since the beginning of the global financial crisis, many central banks have been trying to support their economies by flooding markets with fresh liquidity. By printing more money, physically or electronically, they are trying to stabilise housing markets, increase demand, manipulate exchange rates, boost exports, fight unemployment, and bail out their governments.

The US Federal Reserve has been playing this game by a zero interest rate policy, following the Bank of Japan’s example over the past two decades. The European Central Bank has been trying to stave off the collapse of Europe’s common currency by buying vast amounts of government bonds and providing assistance to ailing banks. The Bank of England has effectively financed more than two thirds of the British government’s recent borrowing.

In recent weeks, central banks have signalled even more aggressive policies. The new governor of the Bank of England, Mark Carney, has suggested giving up inflation targeting. Meanwhile, Japan’s new Prime Minister, Shinzo Abe, is forcing central bank intervention until the official inflation rate reaches 2%.

All of these policies are creating central bank money out of thin air in order to prevent a collapse of price bubbles that similar policies have blown up in the first place. While markets are trying to clean up past excesses, central banks are intervening on a gargantuan scale to prevent precisely that.

Artificially creating money does not make a country any more prosperous. If it were different we would have solved the basic economic problem of scarcity long ago. All this money creation does is confer a temporary boost to an economy, an unfair advantage over one’s trading partners, and it comes with serious long-term dangers.

In this sense, global central bank activism is not dissimilar from doping as we have seen it in the world of professional cycling. And it is just as scandalous.

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