(Kitco News) – Current actions by central banks to lower interest rates into negative territory and to buy back public and private debt has done nothing to defeat the great deflation; instead it is making “the rich richer” – said a former finance minister on Monday.  

“Central bankers who never predicted the great deflation are now busily trying to find a way out with economic and econometric models that could never explain it, let alone point to solutions,” noted Yanis Varoufakis, former finance minister of Greece and professor of economics at the University of Athens, in his latest Project Syndicate post.

Varoufakis is now suggesting that central bankers must get more creative to beat the so-called “great deflation.”

“Unwilling to question the political dogma that central banks must be apolitical, they refuse to think of money as more than a ‘thing.’ And so they continue the search for a technocratic fix to a problem crying out for a philosophically astute political solution,” he said.

However, not all central bankers are as backward-looking as Varoufakis suggested. Some have provided alternative solutions to encourage consumers to spend and banks to lend out money.

Varoufakis highlighted Bank of England chief economist Andy Haldane’s suggestion that all money should become digital, which would allow real-time negative interest rates to be imposed across the board and force everyone to spend.

The former minister also noted that John Williams of the San Francisco Federal Reserve argued that central bankers can tackle deflationary forces by targeting the price level and nominal national income simultaneously – an approach featuring joint efforts by the Fed and the government.

“What separates these central bankers from the herd is their readiness to jettison the myth of independent monetary policy, to accept that money is the most political of commodities, to challenge the sanctity of cash, and to concede that defeating the Great Deflation requires a progressive policy agenda,” he said.

“Simone Weil once said, ‘If you want to know what a man is really like, take notice of how he acts when he loses money.’ Likewise, if we want to know what our societies are really like, we must take notice of how they react to negative interest rates.’”

By Sarah Benali of Kitco News; sbenali@kitco.com
Follow @SdBenali