Central bankers around the world have continued in their vain and experimental policy actions in recent week and months. We have often commented on this late, great phenomenon of the office of central banker. Why?
The current world-wide fixation and veneration of central banking is one of the greatest delusions and manias of all time. Their actions are becoming increasingly desperate and are causing growing tremors and dislocations. (See EVR issues of February, April and June 2013 for additional perspectives.) It is a sad spectacle.
Central bankers are now popularly considered to be the most powerful people in the world. They are seen as the magi of prosperity…the magical healers of all economic and financial problems…the monetary priests that can apparently issue indulgences for all past economic sins. Their actions are catalysts for major wealth transfers within societies. And, amazingly, they are not even elected officials. Yet, these individuals can bring national and global economies to complete ruin. Just why is so much trust put into these officials?
It is certainly not because of their successful track records. Far from it. All the same, it is not surprising that economists have attracted the faith and hopes of the masses. Mankind has been only too willing to be deluded and to accept great lies many times before. There are countless examples of this being the case. Thousands of years ago, the Bible had already noted that those who promote themselves as wise and knowing apart from God are fools that invariably lead people and societies astray.
In this Creation, the majority is rarely right. Just because the majority may believe in evolution or in the big bang theory has no bearing whatsoever on the truth. “For wide is the gate and broad is the road that leads to destruction, and many enter through it” (Matthew 7:13). Moreover, “For the wisdom of this world is foolishness in God’s sight” (1 Corinthians 3:19).
But back to the wise of this age…the central banker. The latest magic wand has been the policy of “forward guidance”. Mark Carney, former governor of the Canadian central bank, recently introduced this new practice policy as one of his first acts as head of the Central Bank of England.
Quoting Martin Wolf, writing in the Financial Times (July 5, 2013), “Mark Carney has been welcomed to London as if he were the messiah. George Osborne, the chancellor of the exchequer, refers to him as ‘the outstanding central banker of his generation’”. (FT July 5, 2013).
Shortly thereafter, Mario Draghi, head of the European Central Bank also indicated that he would adopt the same practice. The U.S. Federal Reserve has already been doing so for quite some time following the Global Financial Crisis.
What is forward guidance? It is simply this: Rather than keeping financial markets in suspense as to what their next policy action will be (i.e. raising administered interest rates, open market activities, etc.), central bankers plainly tell markets what they will do ahead of time.
In some instances, central banks are now signalling their actions two years ahead and further. Is this harmful? Yes, it is. Not necessarily as a specific policy but as part of the slavish veneration that is given to central bankers overall. Their every word and gesture is studied intensely for any indication of a possible policy change.
What is wrong with all of this? Quite a bit:
· Firstly, the types of policies that are today being considered as wise and smart policy are in fact immoral according to the time-worn standards. Furthermore, the track record speaks conclusively on this question. The macroeconomics community is more confused than the field of psychoanalytics. It is just as unscientific.
· Policy prescriptions that have been pursued (and, crucially, new incredibly-unorthodox policies currently considered) amount to theft. Introducing arbitrary policies that can have the effect of crushing one demographic (for, example, retirees, as interest rates have been pushed to the lowest levels in many decades) and, for example, favoring the banking industry (that itself has witnessed much criminality in recent years) is unconscionable.
· Central bankers who have pursued policies that have caused citizenry to lose faith in the value of their money and the future have destroyed entire societies…having been the hand-maiden to broad moral collapse. This happened in Germany in the 1920s and 1930s. Dishonest money cannot be disconnected from overall moral conditions.
Most countries specifically task their central banks to manage inflation, maintain full employment, and to limit the prospect of financial crisis. How do they do all this? Well, they have not done so. In fact, this year central bankers have unleashed great instabilities. Firstly, Shinzo Abe (the new Japanese prime minister) appointed a new lap-dog head of the Bank of Japan, Kuroda. He unleashed a tsunami of fraudulent money. The yen plunged as much as 40% against the euro in a period of less than 5 months. Recently, Ben Bernanke, head of America’s central bank shook markets as he began to talk of “tapering”.
The actions of the world’s major central banks have gone past the point of no return. You must understand this. The recent reactions to the “tapering” comments illustrate this reality in spades. In the space of less than two months, the entire banking system in the U.S. has lost all its unrealized gains on its holdings of government bonds. You can imagine how offside will be the balance sheets of the major central banks which are now incredibly leveraged, operating on a very small sliver of equity. It really amounts to a giant confidence scheme.
There is no painless road back. Therefore, we expect much greater monetary lunacies to yet be inflicted upon the world. Outright Permanent Money Finance (OPMF) will likely follow at some point. We explained this policy in the last issue of EVR. Economists who are promoting this prescription are thought to be “brilliant.” Really? Even a child can look through these plans and recognize them to be fraudulent and immensely unjust.
Finally, is America in the hands of a better central banker (Ben Bernanke) than Japan or Europe? That seems to be the prevailing opinion. Few know this story.
Back in 1996 a certain academic economist advised Japan how to get out of their predicament of near-economic depression and deflation. Short-term interest rates were compressed to near-zero (for more than a decade following); government spending went up by over 50%; and government debt more than doubled (both measured relative to the size of the economy). The result?
Between 1996 and 2006, industrial production growth (smoothed) fell from 2% to zero; inflation declined from 1% to -0.3%; and the bond market far outperformed the stock market (which remained about 40% below the 1996 level). Who was that academic? None other than Ben Bernanke. “Can the blind lead the blind? Will they not both fall into a pit?” (Luke 6:39).