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Monetary freedom: Australia vs. the United States

Posted by
July 10, 2015
in Blog

The following is a contribution by a visiting scholar from the Mannkal Foundation in Australia 


According to the 2015 Heritage Foundation index of economic freedom, the United States is ranked 88th out of 186 countries for monetary freedom, with a score of 76.6. The score for monetary freedom is based on two factors: the weighted average inflation rate of the past three years and price controls. The following graph illustrates monetary freedom in Australia and the U.S., as well as the world average.

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It is clear that there has been a rapid deterioration of monetary freedom in the United States since 2009. In fact, 72 countries have overtaken the U.S. during the 2009 – 2015 period. It is important to ask how the U.S. could move from being ranked 6th for monetary freedom to 88th in just six years. How is it that countries such as Mozambique, Ukraine and Greece rank higher than the U.S. in terms of monetary freedom?

The answer is simple – the Federal Reserve has exercised increasingly unrestrained discretionary authority, especially since the Global Financial Crisis (GFC).

There was a sharp decline in U.S. monetary freedom during the aftermath of the GFC in 2009/2010, as the government and the Fed attempted stimulate the economy. It is important to note that the first round of quantitative easing (QE) began in December 2008. It is no coincidence that the first round of QE directly corresponds with the fall in monetary freedom. Unsurprisingly, perhaps, the Fed has managed to add more than $3.5 trillion to its balance sheet. To put this number in perspective, it is roughly equal to half the size of the German economy.

There is some lack of clarity as to the degree to which QE influences inflation in an economy, but one thing that remains clear is that QE has led to greater uncertainty among investors in regards to inflation outcomes. Low and stable levels of inflation allow people to rely on market prices for the foreseeable future. Future investment and savings plans are made easier. The Fed has unquestionably interfered with the competitive market process, causing money to no longer be ‘neutral.’ They have created an excess supply of money, inflating asset prices, and have therefore reduced the purchasing power of money.

This interference has been the major trigger for a fall in monetary freedom in the U.S.

One would think that the painful post-crisis years would stir some criticism of existing monetary arrangements. However, Dr. Judy Shelton notes that “we see a continued reliance on the acumen of central bankers to avert economic disaster through monetary activism — despite the track record of those who wielded total discretionary authority.”

When monetary freedom in the U.S. is compared to monetary freedom in Australia, you can see the extent to which the Fed’s actions have damaged U.S. monetary freedom. Australia’s monetary freedom index for 2015 is 85.3, and is ranked 9th in the world. This is nearly 10 points above the U.S. monetary freedom score – not to mention 79 countries in front! This high ranking can be attributed to the differing actions of The Fed and the Reserve Bank of Australia (RBA). The RBA has not engaged in QE, distorting market prices like the Fed. The OECD Review of Regulatory Reform in Australia states that:

inflation targeting has helped deliver low and generally stable inflation in Australia… (that) has been similar to the OECD average, despite relatively wide exchange rate fluctuations. They further emphasise that the actions of the RBA, in creating a low inflation environment, have strengthened their credibility.

I would confidently say that all American citizens would be concerned to know that their wealth is being confiscated by the actions of the Federal Reserve and the United States government. Therefore, they should be alarmed to see such a low score for monetary freedom in the U.S. Emphasis must be put on the ways in which monetary freedom cannot only be improved but also fully pursued. There is a need for the Fed to maintain money ‘neutrality’ and for limits to be imposed on the government’s ability to create money to finance its expenditures. The denationalization of money is a solution that would certainly achieve the highest degree of monetary freedom. However, the first step towards achieving monetary freedom is to make citizens, who believe they live in a relatively ‘free’ country like the U.S., aware that monetary freedom is actually very low here. Once this is achieved, Americans can push for solutions.

Let’s get America’s monetary freedom back into the top fifteen, like it was back in 2008.