Central Banks Must Instigate a Return to Normality – Whatever That May Be
By - June 17, 2009

Normal is a slippery concept. What counts as a normal house in California would look like a mansion in Caracas. And the normal economy of 2009 might have been seen as a depressed mess a few years ago. The world's central bankers have to decide on their own definition of normal. Because when the economic situation normalizes, they can start to wind down monetary policies which are abnormal by any standard – quantitative easing and very low policy interest rates. As recently as March, the economic and financial situations were clearly aberrant. But the peculiarities have faded away. Credit spreads have moved from unbearable to high, major banks are no longer threatened with imminent demise and the economic news is hot and cold rather than uniformly miserable. – UK Telegraph

Dominant Social Theme: Provide us, please, with the norm.

Free-Market Analysis: This headline caught our eye because it raises the question we have been addressing on and off throughout this current economic crisis. It occurred to us long ago that the hyper-charged Western economies of the 20th and early 21st century were NOT the norm. Thus, the hue and cry to stabilize the economy was in fact a call for more and more monetary stimulus, of the kind that got us into this mess in the first place. This article, in fact, seems to recognize that – sort of. Unfortunately, having recognized that central banking money stimulation is defining what is economically normal, the article then proceeds glibly past this point to request that the central banks continue to do what they've been doing, only more carefully (as if such banks are ever careful).

The crisis has been a reminder that monetary authorities have wider responsibilities. These include preventing financial disorder. The abnormal policies were instituted in part to do just that. They may have helped keep banks in business, but zero policy rates distort lending markets. And expanding central-bank balance sheets encourages governments to borrow heedlessly. Central bankers are only human and may instinctively prefer faster growth. But that may not be possible at the same time as a normalization of the financial system, an increase in the savings rate in the US and UK and a rebalancing of global trade.

We would like to know what is NOT an "abnormal" central banking policy. Is it normal to have 10 men in a room fixing the price of money while resolutely ignoring the marketplace? Is the market itself not capable of determining the price of money? Of course it is. And why do central bankers have "wider responsibilities?" Is there a functioning financially literate adult out there who believes that central banks can really prevent financial disorder? How exactly are they supposed to do that? We would argue they create financial disorder – disaster actually – not ameliorate it.

There is nothing normal about a central banking run economy. The business cycle (exaggerated by central banking activities) revs like a sprinter on steroids, dragging economies into hyperdrive, so every business venture looks like a winner and every fund manager a genius. Then when the mal-investments are too great, the business ventures too ludicrous and too far along to stop, the economy itself begins to turn. The invisible hand points its disapproving finger and people finally recognize the damage that has been done. Now panic sets in. Stocks sink and ruin is widespread. People lose their jobs, and because central banks insist on more and more harmonization, the downturns are ever-more widespread. Everything marches along in lockstep. This is normalcy?

After Thoughts

The consequences of fixing the price of money – like the results of any price-fixing scheme – are devastating to the economies affected. The constant predictable, cyclical collapses give bureaucrats endless opportunities to demand more power and to declaim against market "failures." The antidote to all this is a market-based money standard – one comprised, perhaps, of gold and silver. It is a measure of the corruption and sycophancy (see excerpted article) of Western culture that such solutions are not allowed to evolve, or even for the most part to be formally discussed.

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