In a SPIEGEL interview, Harvard economist Carmen Reinhart argues governments are incapable of reducing their debts and that central banks are now stepping up to resolve the crisis themselves. In the end, she argues, everyday savers will pay the price. Reinhart: No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis. – Der Spiegel
Dominant Social Theme: Thank goodness for central banking.
Free-Market Analysis: Der Spiegel interviews Harvard economist Carmen Reinhart who has the novel idea that central banks are acting like the "adults" in the room by cleaning up after spendthrift governments.
"Governments are incapable of reducing their debts and now central banks are stepping in."
Perhaps this argument sounds reasonable to a Martian that has not been following exactly what central banks have been doing and continue to do, but last time we looked we weren't Martian.
The idea that monopoly central bankers are "responsible" and politicians are not seems a spurious question, in our humble view. A pox on both their houses.
Politicians spend money as fast as they can and central bankers work for instrumentalities that facilitate that spending.
A monopoly central bank is built to print money. That is what it is supposed to do. To deny it is to deny that a horse is configured to run, or a tiger to hunt, or an elephant, occasionally, to trample.
Here's some more from this "illuminating" interview:
SPIEGEL: Ms. Reinhart, central banks around the world are flooding the markets with cheap money in order to spur economies and support governments. Are these institutions losing their independence?
Reinhart: No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis …
SPIEGEL: But the danger of such a central bank policy is already well known: It can lead to high inflation.
Reinhart: True. But it is certainly more difficult for a central banker to raise interest rates with a debt to gross domestic product ratio of over 100 percent than it is when this ratio stands at 39 percent. Therefore, I believe the shift towards less independence of monetary policy is not just a temporary change.
SPIEGEL: As a historian who knows the potential long-term consequences very well, doesn't such short-sighted decision-making frighten you?
Reinhart: I am not opposing this change, I am just stating it. You have to deal with the debt overhang one way or the other because the high debt levels are an impediment to growth, they paralyze the financial system and the credit process. One way to cope with this is to write off part of the debt …
SPIEGEL: In other words: When the inflation rate is higher than the interest rates paid on the markets, the debts shrink as if by magic. The downside, though, is that this applies to the savings of normal people.
Reinhart: The technical term for this is financial repression. After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds. Nowadays they have more sophisticated means.
SPIEGEL: … with the consequence that people are going to lose their savings?
Reinhart: No doubt, pensions are screwed.
We learn a lot here in a short period of time. Monopoly central banks as virtual appendages of government are doing what governments are incapable of doing – which is cutting spending and reducing debt.
We also learn this is not new, that in previous generations (and monopoly central banking in Europe has been around for much of the past century) the word for this policy is "repression."
Finally, we learn – inevitably – that people's savings are going to be massively affected by all this deliberate money printing.
We could also sum up these insights differently. First, monopoly central banking is an invitation to spend, as politicians are always aware that central banks stand ready to monetize debt.
Second, central bankers will print money to "stimulate" economies, but if we believe what is said in this interview, a deeper game is played. The stimulus is also aimed at inflating currency, thus reducing the amount of debt that governments owe.
A third insight provided by this interview is that central bankers and politicians really don't care about people's savings in a fiat money economy. The savings that people have are merely fungible pools of money that in aggregate have little or no relationship to policy.
There is, of course, a fourth reason that the interview does NOT mention – and that is monopoly central banking is very effective at enriching those who are closest to it. Fresh money, first issued, is very powerful money that has not suffered the ravages of price inflation.
Even more importantly, central bank money printing creates first booms and then busts, centralizing power further in the hands of those conducting and controlling monetary power.
Monopoly central banking aggravates economic cyclicality, encourages government profligacy, inflates the currency and despoils people's savings and retirements. Additionally, it centralizes power and control in the hands of the few at the expense of the many.
It is incredible in this Internet Era that smart people issue forth from European and American schools of "higher learning" still trying to defend and endorse this degraded system.
Even when its defenders such as Ms. Reinhart provide us with a steady stream of justifications and positive analyses, anyone even remotely aware of central banking functionality must see the negatives outweigh the putative positives.
Are there any benefits to central banking? Only if you believe that price fixing and abuse of monetary power is generally a good thing.
Professor Reinhart no doubt believes she is providing us with a realistic – and in a sense positive – perspective about monopoly central banking. She's fooling herself … but not (these days) so many others.