Central Banks as Relentless Boosters of the Rich

Crafty as they are, at no instance did central bankers miss an opportunity to justify their actions by the need to defend against deflation, i.e., falling prices.

They profess to fear a self-enforcing doom cycle, like the one that the world experienced during the Great Depression.

Alas, that depression was caused – like our crisis today – by too much debt. A modest amount of deflation in itself is not bad. Over decades, the United States and other European countries experienced falling prices and high employment – paired with impressive growth.

Deflation is normal in an economy where competition truly works and which features continuous productivity gains.

In reality, central bankers had quite a different form of deflation in mind – deflation in asset markets, as this would cause the debt bubble to burst, leading to a collapse of the whole financial system.

This is where the real sting occurs: Any effort to prevent a bursting of asset bubbles intensifies the deflationary pressure in the real economy, as bad investments and overcapacities are not cleared from the market. Normally, such companies and assets would disappear in a recession.

Low interest rates

But that does not happen in today’s world, where zero interest rates and banks, which cannot afford any write-offs in their books, lead to zombie companies still hanging around.

They are not investing and they are poisoning the waters for others who could still make investments.

The net effect for regular folks is that, as savers, they need to save more for retirement since the return on their savings is zero or negative. More likely, they need to work ever later in life – if they have careers that let them.

Western institutions have long criticized the Chinese authorities for operating in a relentlessly debt-dependent economy. Truth be told, the Chinese are just following our example.

The common denominator is cheap money, which encourages investments that are not as attractive as in periods with normal interest rates.

Explaining the crisis

The whole cycle unfolded like this: Once the Chinese started their own debt-financed party, they drove up commodity prices worldwide.

This encouraged commodity exporters to invest in bigger capacities. Then, low rates encouraged the shale gas investment boom in the United States.

Now, as global demand drops, the extended capacities drive down the price of oil and other commodities, further destabilizing many regimes that were already on the brink politically, economically and socially.

At first glance, this seemed like a promising strategy, considering that lower oil prices tend to boost domestic demand in oil-importing countries.

But at a systems level, the bigger problem is the pressure faced by the oil-exporting countries to sell financial assets in order to make ends meet.

This reduces worldwide liquidity and therefore risks to cause falling asset prices – as can be seen in the stock markets since the fall of 2015.

Of course, our central banks will come up with a solution to this upcoming crisis: Yet more money!

Dismantle the central banks

It is fascinating to see that even more than 30 years of mismanagement by central banks, with significant damage to the real economy, has not yet dispelled the “hope” of politicians, business leaders, financial markets and the broader population of our countries that recovery rests on the shoulders of the central banks.

In the next emergency, we will once again see pictures of Yellen, Draghi and Co. assuring us that they will “rescue” the world one more time with their interventions. In reality, they are poisoning us even more!

The false medicine of the central banks is less and less effective. The side effects are more and more visible. Once the financial markets lose trust in the almighty power of the central banks, we will face the “mother of all crises.”

The fickleness of so many bank stocks these days is a bad omen, indicating that this day may be near.

It is time for a fundamental shift in policy – if we can still bring it about. Either way, try we must. We need to stop the nefarious machinations of the central bankers, especially the high priests working at the U.S. Fed.