Thank god for the refreshingly heterodox Adam Creighton

Another terrific piece of journalism today. I think Adam and I are the only two commentators in the country questioning this convention:

Meanwhile, the risks of wide-ranging bureaucratic intervention in the economy are building.

Financial markets of course will continue to demand further action from central banks. But who make up these financial markets? They are often highly paid people working for banks that naturally seek to defend their positions. Central banks' well meaning attempts to shore up economic growth necessarily benefits the financial sector -- the first recipients of newly created funds, some of which inevitably end up as profits and bigger pay cheques.

For the average taxpayer, though, money creation might prove very damaging. The economy "works best when producers and consumers, employers and employees, can proceed with full confidence that the average level of prices will behave in a known way in the future -- preferably that it will be stable", Friedman wrote. Confidence in future price stability has fallen since the GFC, as seen in the widening range of expectations of future inflation.

Actual inflation appears dormant for now, and big lenders appear content to buy bonds at very low interest rates. But bond holders were very wrong about future inflation in the 1970s, and as Friedman wrote, "monetary policy action takes a longer time to affect the price level than to affect the monetary totals".

The amount of money has risen by almost 40 per cent in the US since early 2008, while consumer prices have risen only 6 per cent. More money chasing the same amount of goods and services should ultimately prompt inflation. Monetary policy has been likened to pushing on a piece of string -- you could pull to stop inflation but couldn't push to halt a recession.

Central banks' money creation programs have also taken the pressure off politicians to reform by artificially lowering their cost of borrowing. Mandates typically forbid outright purchases of government debt by central banks, but in reality private banks buy bonds with the money central banks give them, which has the same effect.

Curbing taxes and inefficient and unproductive government social programs is the far better way to boost growth, but it is politically far easier for governments and vested interests to call for lower interest rates or creation of extra money.

Cheap money has also retarded private banks' incentives to clean up the balance sheets and change their practices. In a truly capitalist system, their highly leveraged business models would have been wiped out by the GFC.

Western democracies have become slaves to the short run. Keynes's famous quip that we're all dead in the long run, routinely trotted out to mock critics of debt-fuelled government spending, is only true if humans stop reproducing.

The reality is that the benefit of getting policies right today overwhelms the shorter-term costs, however painful they might be. Friedman helped popularise the axiom "there's no such thing as a free lunch". Central banks appear to be enjoying one for now.