Are Central Bank Policies an Insult to the Gods? - The Daily Reckoning

Are Central Bank Policies an Insult to the Gods?

Dec 3, 2015


Baltimore, Maryland

Today's the big day.

Mario 'whatever it takes' Draghi is expected to goose up equity markets with more stimulus measures.

China is also supposed to come forward with more new money.

And in the US, Janet Yellen told the Economic Club of Washington:

  • Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.

    On balance, economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labor market. That helps strengthen confidence that inflation will move back to our 2 percent objective over the medium term.

Europe, Asia, America - if they had central bankers in Antarctica, or even on Mars, we have little doubt that they, too, would have the situation under control.

But the idea behind all these programs - in fact, the idea behind the central banks' policies for the last 30 years - is that quasi-public officials can manage 'demand' and thereby improve the workings of an economy.

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This concept is either a mistake or a flimflam...perpetrated by either fools or knaves...depending on how you look at it.

That is, it is either an intentional transfer of wealth from the people who earned it to the world's elite insiders, or the transfer is an unintended consequence of a policy error.

We lean to the larceny explanation. QE may have been a mistake when Japan 20 first tried it years ago. But after so many years of trial and error, we now know how it works: It takes wealth from some people (mostly poor and middle class) and gives it to others (mostly rich).

We know from experience and theory that trying to rob the rich to make the poor better off really doesn't work very well. The rich duck and dodge. And the poor lose the incentive to make it on their own.

Now, we're discovering - as Charles Gave points out - that the opposite approach doesn't work either. Central banks can't stimulate real economic growth any more than they can stimulate real hair growth.

Central bank lending rates in Europe are already below zero. We have been amazed and befuddled by these negative rates for a long time. They suggest an impossibility: that the real value of money is less than nothing. And if that is so, the value of everything money buys - including labour - must also be less than zero...

...which is such a strange and preposterous thought that it can't be correct.

But after light meditation and heavy drinking...aided by insights from Charles Gave...we think we have a better understanding of it.

First, says Charles, negative rates are an affront to nature...and an insult to the gods. Money today is inherently worth more than the same amount of money a year from now. Because something could happen in the intervening period. Someone else could buy the house you wanted. The borrower might die. You might die.

That's why lenders need to be paid for the risk that something will go wrong...

Meanwhile, the Old Testament tells us that God chased Adam and Eve from the Garden of Eden, with this curse: From now on, 'you will earn your bread from the sweat of your brow.'

Yet, the goal of central bank demand management is to upset God's applecart. The feds want people to consume their bread before they even put on their work gloves.

In the long run, this clearly won't work. Keynes, from whom the feds draw inspiration, said not to worry about it. In the long run, we're all dead anyway.

Keynes is dead. And we are in the long run now.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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