Monopoly Central Banking Is Weaker Than You Think

Everything you 'know' about the Fed is wrong ... 5 misconceptions about the effects of QE and monetary policy ... Few would still argue against the assertion that the Federal Reserve has been central to the financial stabilization and economic recovery from the 2008 crisis. It fixed the plumbing and are now trying to incentivize animal spirits to pump water through the pipes. The debate has now migrated to exit strategies and whether the accumulating side effects of exceptional monetary accommodation outweigh incremental benefits. Read Minyanville's "The Givers and Takers of the Boston Bombings." Nonetheless, it is the Fed, so views are heated, and many mis-perceptions persist. The concept of money-printing resonates strongly and intuitively with almost everyone, but most of the intuitive reactions to the Fed's quantitative easing are turning out to have been wrong. Here are some of the major myths that linger. – MarketWatch

Dominant Social Theme: Central banking is no big deal.

Free-Market Analysis: Central banking is fundamental to the current crippled economic model of the West. It is a new model, always expanding, always changing.

Basically, central bankers fix the value and volume of money, doing so in ways that distort the larger economy and cause first booms and then busts. The globalists at the center of this ruinous system value it above all other resources and will do anything to defend it.

The ability to print money at will with all the attendant benefits is the fulfillment of an ancient human dream and no doubt will be defended by some to the last breath. In the meantime, those who benefit directly or indirectly will launch broadside after broadside defending monopoly central banking and its fiat-paper products.

This article posted over at MarketWatch is one more example of this sort of defense. Its authors, Mark Dow and Michael Sedacca, choose to maintain that central banking is not so powerful as supposed. Here are their points, along with our responses.

Money printing increases the money supply ...

The Fed does not control the money supply, only the base money (or inside money). Of course, such money is called super money for a reason. And this analysis does not deal with short interest rates that the Fed also controls. The idea that the ability to print up to US$16 trillion in short-term loans (apparently never repaid) is an incidental sort of power strikes us as, well ... ridiculous.

QE is 'pumping cash into the stock market' ...

Little of this money finds its way into the stock market, we are told (though how this statement can be made with such certainty is puzzling to us). Anyway, the idea is that about 82 percent of the money the Fed has injected since QE started has been re-deposited with the Fed as excess reserves.

Only about 18 percent has circulated. But excess reserves can circulate over time, thus turning into both monetary inflation and price inflation. And some of the money the Fed has printed goes to non-bank holders of targeted instruments.

The article maintains that equities have gone up so much in response to QE not because of actual money being injected into the market as a result of QE but because of perceptions – "psychology and misconception."

By taking an aggressive stand, the Fed signaled a positive message to markets: "I've got this." The confidence that the Fed would do everything it could to protect our economic downside stabilized animal spirits. Then it slowly but surely enabled risk-taking to re-engage. The fact that so many people believe that the Fed would be "pumping money into the stock market," and because so many buy into the "don't fight the Fed" aphorism (notwithstanding September 2007 to March 2009), the effect of the Fed's message was that much more powerful.

Our response: This seems a kind of contradiction in terms. Either central banking is a powerful instrument or it is not. Claiming it is not but then making the case that the Fed can move markets simply because so many refuse to "fight the Fed" is a curious kind of argumentation.

QE will create runaway inflation ...

Of course QE is going to create massive inflation. Inflation is the printing of money. And money has been printed. Price inflation has occurred as well, but as the US government refuses to acknowledge it, articles like this can make the argument that it has not occurred. But it has. Perhaps up to 10 percent a year, according to monetary critics like Peter Schiff.

The article goes on to make this astounding point: "But, there really has been no inflation, even with rounds of QE and interest rates stuck at zero. What we have learned in this crisis has driven home the points that the lending and borrowing that drive the money supply are more sensitive to risk appetite than they are to the price of money."

Huh? No inflation? Maybe these authors don't shop for themselves?

QE is the reason we have high oil/gasoline prices ...

We won't comment on this point much except to say that printing money is generally debasing and affects most every product and service in a given economy. Why should oil and gasoline be exempt?
QE has debased the dollar ...

"This is an excellent example of repeating a falsehood until it becomes accepted as true," we are told. Again, we find this a startling statement. Apparently, these authors have not seen the generally available charts showing dollar debasement from the formation of the Fed in 1913. The line goes straight up (or down) showing the dollar has lost up 99 percent of its value, if not more, depending on which statistics one chooses to use.

Bottom line: Anyone alleging debasement is working from hearsay and priors, not the scorecard. And there are some pretty high-profile people still throwing around the 'debasement' word.

We may not be high profile, but we're willing to "throw the word around." Debasement. Debasement. Debasement.

Conclusion: Money printing is debasement and the ability to print money-from-nothing gives a tiny group of people a godlike power. Denying it doesn't lessen the reality.

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