Central Bankers: Debase to Create

Central Banks Act With a New Boldness ... When James Bullard, president of the Federal Reserve Bank of St. Louis, arrived in Frankfurt last week, he issued an unusual public warning to the European Central Bank : Be bolder. Central bankers, anywhere in the world, are a cautious lot. They prefer slow and steady over the dramatic gesture. And they rarely go public with criticisms of other central banks . But the economic stagnation of the major developed nations has driven central banks in the United States, Japan, Britain and the European Union to take increasingly aggressive action. – New York Times

Dominant Social Theme: The good, gray men have their collective hand on the tiller and can steer us to safety.

Free-Market Analysis: This article is a companion piece to our lead story this issue (see above) and provides more evidence that one needs to look at patterns and promotions rather than taking pronouncements at face value when it comes to world affairs.

Of course, the article (excerpted above) does seem logical in that we know central bankers are concerned about lagging economies and believe they can debase currency (print money) to stimulate "growth."

But if one utilizes the correct terminology (debase) and tracks the manifestations of debasement around the world, one can come to several conclusions.

First, an uneasy balance is being sought between "revolution and recovery" – that is, those in charge of central banking policies around the world are trying to push the entire financial system toward more centralization and, at the same time, avoid outright rebellion in Europe, the US and elsewhere where these policies are taking hold with perhaps unexpected viciousness.

There is nothing especially controversial, in our view, about postulating that there is a new global economic system in the making because the same powers now in charge previously created the building blocks for this system after the Second World War.

The UN , the IMF , the World Bank and various international trade organizations still exist today and have more power than ever. Now they are being employed in the service perhaps of the evolution of the post-war environment, which was quasi-globalist but had a long way to go.

Today, it seems, we are observing the glimmers of a new paradigm, though unlike Bretton Woods , we are not yet being informed of its fullness. That is perhaps because those supporting these changes do not have a full-fledged crisis to justify what's taking place. Thus a need for secrecy.

Nonetheless, we can see a process unfolding and would be foolish, in the scheme of things, simply to discount it. Rather than war, it is the global downturn itself that is providing the beginnings of a justification for some of the moves being made, specifically the worldwide effort to reinflate (debase). Here's more from the article:

Because governments are not taking steps to revive economies, like increasing spending or cutting taxes, the traditional concern of central bankers that economic growth will cause too much inflation has been supplanted by the fear that growth is not fast enough to prevent deflation, or falling prices.

The Fed has announced plans to keep borrowing costs at historic lows until unemployment declines. The staid Bank of England has bought more than a half-trillion dollars' worth of bonds to ignite British business activity. Last month, Haruhiko Kuroda, the new chairman of the Bank of Japan, steered the central bank toward an audacious new policy of reinflating the Japanese economy by doubling the money supply. It is considered the boldest step so far by a central bank.

So far, the results of these activist central banks have fallen short of expectations. "I'm not sure why we're not getting more response," said Donald L. Kohn, a former Federal Reserve vice chairman who is now at the Brookings Institution . "Maybe we've made some progress in identifying some of the causes, but it's not fully satisfying why we have negative real interest rates everywhere in the industrial world and so little growth."

... The Federal Reserve in the United States has been significantly more aggressive since December 2008, when the Fed reduced its benchmark short-term interest rate nearly to zero. Ever since, it has pursued a pair of experiments aimed at dragging other interest rates closer to zero, too. The Fed has tried to bolster confidence that rates will stay low by talking more about the future.

The article's ultimate point is that throughout the West, central bankers are getting more aggressive about printing money and are doing it in bolder ways. Actually, we'd argue that these good, gray men have been doing pretty much what they've wanted for a century, only they have never admitted to the fullness of their manipulations in the past.

Unlike Mr. Kohn, we are not surprised at the failure of these manipulations to perform as advertised. Monetary debasement funneled through financial vehicles and into various stock markets is an incredibly tedious and complex way to "stimulate." But it is necessary if one wants to 1) draw out the pain and 2) control the process.

It sounds rash, perhaps, to accuse central bankers of wanting to prolong the current economic crisis but to us it seems inescapable. The monetary debasement probably will only end when economies finally roar back to life in all their distorted and maniacal glory.

By not allowing economies to purge themselves of failed business and corporations, top central bankers have guaranteed that whatever "recovery" actually occurs will be one that includes manifold bubbles and distortions.

Such recoveries will also boost interest rates, inevitably, giving rise to further crises. These crises will, in our view, be critical and unavoidable. As the world's financial economy threatens to collapse, cries will be raised for a new "Bretton Woods" and a new and more comprehensively global monetary pact. One guess, anyway.

You may disagree with this scenario, dear reader, but can you discount it outright? Accept it may have a correlation to reality and one then must harbor a suspicion that articles like the one we are commenting on are not properly explaining reality.

In fact, the ultimate aim here may be to CREATE a further crisis in order to resolve it.

This is certainly a cynical analysis but can we say with certainty it has never been tried before?

Conclusion: Don't believe everything you read, even in the New York Times .