STAFF NEWS & ANALYSIS
Investors Beware of Central Banks Bearing Austerity
By Staff News & Analysis - February 06, 2013

IMF: Central banks must be responsible for financial stability … Financial stability should become a core central banking objective alongside monetary policy, although potential conflicts between the two functions might require some institutional redesign, the International Monetary Fund (IMF) said. The IMF noted in a study that although central banks had delivered low inflation, they had failed to prevent the devastating global financial crisis of 2008–2009. As a result, the IMF said new tools were needed to prevent excessive risk-taking, and that central banks may be best-placed to take on these tasks, although monetary policy should stay primarily focused on price and output stability. – Star Online

Dominant Social Theme: Central banks need to reduce the supply of money.

Free-Market Analysis: We were struck by a modest report (excerpt above) in the Star Online because it shows us once more that when it comes to monetary control, the International Monetary Fund is a big booster of central banking.

The IMF and the world's current monopoly-model central banks work hand-in-glove; this is simply an unfortunate fact.

The powers-that-be set up a financial and economic system after World War II to keep the rest of the world, especially the developing world, in a kind of penury. The poverty is to be lifted only as the IMF and Bank for International Settlements (BIS) decide to do so.

Japan was flooded with cheap money in the 1980s and the Japanese exported and purchased US Treasury bonds – further funding the US deficit. China was flooded with cheap money and purchased US Treasury bonds, funding the US deficit. And like Japan, China benefited from torrents of currency, which enriched not just state coffers but also the pockets of the people.

The next target, as best we can figure, is Africa. Africa is to be consolidated and turned into a neo-Chinese/Japanese play. Africans will be exposed to cheap money and its benefits. The world will learn once more that central bankers are a kind and generous professional group – dedicated to alleviating poverty in the world's most difficult regions.

There is no doubt that printing massive amounts of money can set an economy afire. But like any conflagration, the fire is likely uncontrollable. Economies triggered in this manner are soon distorted, with many businesses being started and even expanding significantly that would not even exist in a less stimulated environment.

A fiat-currency economic boom is bound to be unstable and fiat money economies in the long term are unstable as well. The US economy has all but been destroyed by fiat currency stimulation.

Manufacturing has moved abroad and US workers face a bleak future amidst low-paying service jobs. In China, Brazil and India – all economies stimulated mightily by central banking – there are obvious distortions as well. Price inflation is rampant and certain sectors boom almost uncontrollably.

Nonetheless, IMF honchos wish for yet more central banking control. Here's more from the article excerpted above:

"The interaction between monetary and macro-prudential policies has implications for institutional design. Policy coordination can improve outcomes, making it advantageous to assign both policies to the central bank," the IMF wrote.

The crisis sparked a push for widespread financial reform, led by the Group of 20 of advanced and emerging economies.

But harnessing monetary policy to the goal of financial stability is controversial in central banking circles, where the consensus that policymakers should concentrate on inflation and growth has been strained by the lessons of the crisis.

The US Federal Reserve's vice-chair, Janet Yellen, in a speech early last month, said financial stability was essential to sustained economic growth and prosperity. That connection is implied by the US central bank's dual mandate of supporting full employment along with low and stable prices.

A central bank does one thing really well. It prints money. The idea that central bankers can "create employment" long-term or even more questionably "stabilize" a given economy is dubious in the extreme. Yes, it's true fiat money printing can create massive booms but such economies are inevitably unstable. Economic reality is traduced by over-printing of paper money.

That the same central bankers that create money booms should also preside over so-called macro-prudential policies is fairly ludicrous. It is, in fact, a subdominant social theme: Central bankers are so good at larger monetary policy that they should also moderate economies from a risk standpoint.

That's what macro-prudential policy is. It's a fancy way of saying that central bankers should reduce money printing and lending if they feel the economy is getting out of hand. Having produced the problem, they are now expected to preside over its resolution. Such policies are commonly called "austerity" – and we can see how well they work in Europe.

Spanish and Greek youths are rioting and there is unrest elsewhere, as well. Economies throughout the EU are being further leveled by EU prudential policies. The idea that central banks can rationalize risk any better than officials can calculate how much money an economy needs is a foolish one.

Human beings cannot predict the future and market competition is the best way to decide these things.

After Thoughts

Investors take care. As these policies take effect – if they do – realign your portfolios accordingly. Nothing kills growth like a central bank determined to moderate its member banks' monetary behavior.

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