No Exit – Lost and Out of Control :: by Wilfred Hahn

Recently the world received a warning. There will be no exit. For central banks, accountability will not be escaped. And “thus spoke Zarathustra”…more specifically, the Master of the Universe himself, the head of the U.S. central bank. Recently, he made a big pronouncement and the world listened.

What are we speaking of? Nothing other than the announcement by Ben Bernanke of the U.S. Federal Reserve Board (Fed) that they would not “taper.” Readers might not appreciate the large kerfuffle that this caused. Many observers were shocked. Earlier, the Fed had signalled that it would like to begin “tapering.” As a result, interest rates promptly soared. Bond markets everywhere, from Indonesia to Spain, threw a tantrum. Then, when the time came for their decision on September 18th, the Fed balked. It announced it would not “taper.”

What is the “taper” all about? Simply this: Back in 2012, when the economy was again sagging, the Fed felt it could not risk a further deceleration and again began a program of buying $85 billion worth of treasury bonds and mortgage-backed securities per month. It can do so quite easily, though this might amount to a gargantuan $1.02 trillion per year. It can pay for its purchases by simply crediting banks with new reserves.

For all intents and purposes, it is a form of money printing. It’s a clever little technique, since by doing so, these actions also lower the debt burden for the federal government. The Fed collects the interest on all the fixed-income instruments that they have purchased and gives it back to the government. Voila.

But now, the Fed said it would not stop this program. They would not “taper” (reduce their pace of buying every month); they would continue. A number of conclusions and confirmations spring from this action.

Firstly, the Fed now realizes that there is no easy exit. Once the financial markets, both domestically and globally, are used to the drug of cheap and unlimited money — this being money that has not been earned by human effort and wages — they become hooked. It is like heroin. A few doses may be necessary when the patient is in triage with deep economic trauma, but no more. As soon as drug dependency is established, the exit can only be painful. This situation applies to the actions of all the world’s major central banks including the Bank of Japan (whose monetary arteries have already collapsed long ago), the European Central Bank, the Bank of England and others. Taken together, the world’s eight biggest central banks have bloated their money base by over $9 trillion over the past five years. The balance sheets of all the world’s central banks (almost all of it by fiat) now amounts to an equivalent of 32% of world economic output.

This is unconscionable. Yet, very few officials have any great worries. They have no sense of the grave immorality and kleptocracy that these policies are ushering in. Wealth distribution, extremely unequal as it is already, will become even worse. Without a doubt, that is indeed what is happening. Just why would sales of Ferraris be at an all-time high, while revenues at Wal-Mart are slowing down? (See Charts #1 and #2 on page 3.) This is symptomatic of a much broader trend.

The larcenous policies of the major central banks are indeed endorsed at the highest levels. In time, these actions will be sure to contribute to an obliteration of morality at all levels of society. To illustrate, in the great Weimar inflation of the 1920 to 30s (another era of massive monetary malfeasance, though not the same form) people would no longer wait to get married. Money was devaluing so quickly, waiting to pay for a wedding was financially hazardous. Better to cede to economic advantage and get hooked. Out-of-wedlock births soared. This is but one anecdotal illustration of the effects on morality.

What is worst of all is that central banks themselves are now unsure and confused…and desperate. They have pumped many trillions of dollars into the world economy and what do we see? Nothing more than slow, creeping economic growth in most of the developed countries in the world. Even the faster-emerging countries are facing economic decelerations at the present time. All the trillions in fabricated money has been shown to be largely impotent. (See Chart #3 which shows the trend in world trade. No acceleration is evident!)

In Europe, an economic depression is underway in many countries. While some economists are lately ecstatically celebrating the fact that economic collapse has stabilized in some of these nations, the fact remains that unemployment levels in Spain, Greece and other European countries is massive…at much higher levels than in the U.S. during the Great Depression of the 30s.

Our expectation all along has been that even greater monetary cleverness yet lies ahead. Too clever by half to this point, the major central banks have lost their reverse gear. They have discovered that they cannot unwind their actions. Should financial instabilities strike again, they can only ramp up their money creation to even more absurd levels.

More and more economists are prescribing “money finance” policies. This involves true high-power money creation. What these types of policies comprise is the direct purchase by central banks of new government bonds. In effect, central banks would be directly financing governments with newly-created money. Governments will be sure to spend this free money. What government wouldn’t? No doubt, this will cause a surge in economic activity…but only for a time. Inflation will also surge.

We anticipate that many people will be taken in by these possible actions. Thinking that a new prosperity is underway, suddenly, they will discover that it is a trap…a false, empty, fabricated prosperity.

The Psalmist brings a comforting message for those that loathe the ungodly environment of the world at this time. “This is what the wicked are like—always free of care, they go on amassing wealth. Surely in vain I have kept my heart pure and have washed my hands in innocence. Surely you place them on slippery ground; you cast them down to ruin. How suddenly are they destroyed, completely swept away by terrors!” (Psalm 73:12-13, 18-21).

“Will not your creditors suddenly arise? Will they not wake up and make you tremble? Then you will become their prey” (Habakkuk 2:7).

“While people are saying, ‘Peace and safety,’ destruction will come on them suddenly” (1 Thessalonians 5:3).