Central Banks Can't Stop Global Unraveling
By Staff News & Analysis - March 02, 2010

Don't go wobbly on us now, Ben Bernanke (left) … Mervyn King, the Bank of England's Governor, seems strangely alone in … seeing the absurdity of a recovery strategy where everybody tightens at once and surplus states keep on dumping excess capacity abroad. "I was struck by the mood at the G7, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth. That can't be true of everybody," he said. The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus – QE, of course – to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract. … Fed chairman Ben Bernanke told us in his 2002 speech "Deflation: Making Sure It Doesn't Happen Here" that: 1) Japan's slide into deflation was "entirely unexpected", and that it would be "imprudent" to rule out such a risk in America; 2) "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted"; 3) that a "determined government" has the means to stop deflation, if necessary by use of the "printing press". Yet here we are, facing exactly that risk, unless you think one good quarter of inventory rebuilding has conjured away our debt bubble. The one-off inflation blip caused by a doubling of oil prices is already fading, revealing once again the deeper forces of deflation. Core prices fell 0.1% in January. They plummet from here. So why has Bernanke broken ranks with King and begun to flirt with disaster by tightening too soon? Has he lost control to regional hawks, as in mid-2008? Have critics in Congress and the media got to him? Has China vetoed QE, fearing a stealth default on Treasury debt? Don't go wobbly on us now, Ben. If the governments of America, Europe, and Japan are to retrench – as they must – their central banks must stay super-loose to cushion the blow. Otherwise we will all sink into deflationary quicksand. – UK Telegraph

Dominant Social Theme: Liquidity is necessary to avoid a deflationary depression.

Free-Market Analysis: This article by the Telegraph's best financial writer, Ambrose Evans-Pritchard, is a stunner because it shows us the fallacies of Keynesian economics in real time. The article, when we picked it up initially and decided to analyze it, wasn't getting a lot of play, but then the Drudge Report posted a link as well. But even though we try not to cover articles that are too well disseminated, we can't resist with this one. Does Evans-Pritchard believe what he writes in this article? We suppose it is obligatory if he wishes to keep his job. Mainstream media does not take kindly to free-market Austrian monetary analysis.

But we do not write for the Telegraph, and we don't have the pressures that Evans-Pritchard evidently writes under. We have come to quite different conclusions, therefore. We are learning as we go. Yes, every day we observe the differences between current reality and analyses of the Great Depression of the 1930s, especially as regards America. We are increasingly in a position to make a determination over what was covered up or twisted to buttress certain arguments. Since we have written about these issues – and speculated about them for several decades – the ability to live through them, while exceptionally painful is also in a sense gratifying.

For instance, there are those who maintain that the Roaring 20s was a time of monetary scarcity, and that a lack of money printing led to the market crash and the Depression. This in fact is a quasi-Keynesian argument so far as we can tell, designed to support the idea that more fiat money is always better (and if they'd only printed enough in the 1920s, the Depression would never have happened). But now, based on real-life observations in the 21st century of the current financial crunch (and others before it) the idea that the Roaring 20s was a time of monetary scarcity is hardly credible to us.

Then there is the monetarist perspective – that the Fed, by tightening in the 1930s, or at least not loosening enough, turned a downturn into a disaster. This was a far more feasible scenario to us and others, and has been vehemently debated for decades. But now we have had the opportunity to watch a major credit crisis unfold in the 21st century. Lo and behold, we have seen to our satisfaction that it has NOTHING to do with monetary policy after-the-fact and everything to do with an over-printing of fiat money for months, years, even decades, prior to the latest great unraveling.

Murray Rothbard and the Austrians had it right after all! Friedman had it wrong. It is the overprinting of money that causes the crash – not central bank tightening or other maneuvers late in the day that "trigger" what was actually unavoidable. It is the unrestrained build-up of fiat money in the system that causes the problem. Yet Evans-Pritchard – a reporter of incisive monetary vision – sees none of this. This article of his, excerpted above, is a funny combination of monetarist and Keynesian theory – for both theories attribute to central banks the ability to ameliorate or even avoid a lengthy depressive economy worldwide with the right series of monetary actions.

Read it for yourself. Central banks, he writes, have to print money fast and furiously and make sure that there is enough credit and money available to avoid a dread "contraction." Has he been living through the same financial crisis we have? There are several obvious problems with this analysis, in our opinion. First, according to Austrian monetary theory it is GOOD if there is disinflation or even deflation during an economic downturn. This means the money that people have lasts longer and gives them additional capital opportunities. Second, and perhaps more important, central banks have no ability to stuff the cooked carcass of a moribund economy, locally or globally, with cash and expect it to waddle to its feet and take flight.

This has been the most important insight. And doubtless many Bell readers and feedbackers have reached the same conclusions we have simply by living through this horrid experience. There is no way, as we see it, that central banks can print enough money to make things right. The distortions of the economy go back a half-century or more. The amount of material goods, of wrong-headed industrial and investment decisions, of misaligned resources are deeply rooted indeed. To some degree, printing money may prop up some of the worst of these excesses for a period of time. But once the economy has decided to purge – it will purge. Does anyone believe for instance that GM is going to survive and thrive by building tiny, green, government-mandated cars?

Mercantilist central banks can print all the money they want, but in a Great Unraveling such as we have today there is nowhere for that money to go. People have realized that there is ruin all around them. The scales have fallen from their eyes and they understand for the first time in years – perhaps in their entire lives – that much of what they understood to be normal and natural in society was the product of the overprinting of fiat money, of monetary stimulation in fact. Many cannot put it into words, exactly, but they "feel" it nonetheless and act accordingly. They pay down debt. They do without. They live simper lives.

We are paleontologists transported back to the age of dinosaurs. We can see clearly now, what we only speculated about before. The Austrians were correct. Evans-Pritchard is wrong. Once an economy has been driven fully off a cliff by fiat money there is no way to salvage it by printing yet more money. These are fictions prated by Keynes after-the-fact in the 1930s to justify whatever it was that politicians wanted to do at the time. Neat fictions wrapped in impenetrable numerology and other mumbo jumbo.

Central banks can print all the money they want. But there is nowhere for the money to go. Economies must purge themselves. Government "stimulus" programs only prolong the pain by propping up businesses that need to fail – simply put, they will attract capital that ought to go to healthy new businesses. Depressions and recessions are economic signals too, and their messages are easy to foul up. Let government inject trillions in jobs programs, let central banks distribute more trillions to too-big-to-fail entities, and the market itself will grow confused and aimless. Real capital will be dissipated. Growth will never occur, save in the most artificial and manipulated sectors of the marketplace –equity markets and in multinational sectors where globalist entities do government business or are involved in various military and security endeavors.

After Thoughts

This is what happened in Japan. This is what is happening now in America. This will surely happen in Europe as EU-crats prepare to bail out Greece and Lord knows how many other countries. A short, terrible downturn may have been turned into a decade's worth of agony or worse. Of course, it doesn't have to be that bad for everyone. We can still buy gold and silver and take delivery. We can trim our debts and streamline our finances. We can do for ourselves, all the sensible things that government – and those who stand behind it – will not.

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