UK Central Bank Loses Credibility
By Staff News & Analysis - August 11, 2010

Bank of England's inflation excuses begin to wear thin … Mervyn King (left), Governor of the Bank of England, will on Wednesday morning hold up his hand and admit he got the UK economy wrong. Britain's central banker-in-chief may not put it quite like that, but the message from Wednesday's August inflation report will be loud and clear. Inflation next year will be substantially higher than forecast just three months ago, and growth will be notably slower. The Bank will have an excuse: George Osborne's decision in the June emergency Budget to increase VAT from 17.5% to 20%will push inflation higher in 2011. But the Bank's excuses are beginning to wear as thin as the "dog ate my homework" has in the classroom. – UK Telegraph

Dominant Social Theme: What's wrong with Mervyn? Time for a different King?

Free-Market Analysis: The power elite insists on its memes. Having put a dominant social theme into play, it continues to promote the theme no matter whether it is credible or not. This made sense in the 19th century when the elite controlled all the possible channels of communication. Sheer repetition could drive a promotion home – and dampen even the most persistent critic.

But in the 21st century, much has changed. With so many different media outlets, it's impossible to control the message. Insisting on promotion that's obviously failing begins to look downright weird. Thus it is with Mervyn King. The dominant social theme is clear enough: "Central banks work and those who run them are as close to Godhead as possible." But 21st century media has made King's failings a good deal clearer. The Bank of England did not anticipate the Great Recession and King apparently has not anticipated the result either – increasing inflation of the sort that presages stagflation.

King has probably been looking at the wrong figures. Alternatively, he wants to create inflation in Britain to whittle away at that country's tremendous debt. Perhaps it's a combination of both. King may want a little inflation, or maybe a lot, but he must want it on his terms. And one thing he doesn't want to do is to look like he doesn't know what he's talking about, or that he's not "in control."

Here at the Daily Bell we've tried to explain economics from a (neo) Austrian perspective. We've pointed out that the money supply is constituted of money, not credit or loans. We've tried to show that in a fiat-money economy the mechanism of deflation is hard to institute and recently we tried to explain that much of what people, even top-level economists, take for deflation is more accurately called deleveraging or price deflation. This might explain the persistence of "inflation" in Britain. (We're not sure how much deleveraging is really taking place in the States either, despite the eternal gloominess of the deflationary camp.)

Is it possible that King fell victim to his own falsehoods (for all of these top people know the truth about free-markets economics) and began to believe Keynesian statistics that showed the "money supply" was falling? Certainly, the power elite, and those who work for it within monetary capacities, are terrified of deflation because it removes the one weapon in the central banking arsenal that they can truly count on, which is money-creation. Has King, then, been erring on the side of so-called safety?

It is, of course, money creation, and its hoped-for results of economic reflation, that allow central bankers to pose as wise men. The ability to print money and then more and more money is the singular and specific feature of modern central banking. Nothing much else works – not "sterilization," not raising interest rates (always too late or too soon), not even discount window manipulations.

How to explain King's wrong-headedness? We believe the power elite that has organized and promoted central banking around the world is struggling with a difficult problem that might explain it. There are plenty of indications, for instance, that the powers-that-be hope to move the world toward a global currency.

In fact, the IMF has spoken openly of SDRs as one option and even such a large and powerful state as China (competitive with the West) has endorsed this potential option. More recently the IMF spelled out the end-game which would be in some sense to transform SDRs into "bancors" – Kenyes' suggested global currency. Perhaps, if the destruction of current currencies is complete, the bancors will be backed by a measure of gold.

But King, and those like King, are on the proverbial horns of a dilemma. If the intention is somehow to weaken major currencies (the pound and the dollar) in order to set the stage to introduce a new currency (as some conspiratorial thinkers have suggested), then central bankers themselves must be seen as misguided and even nugatory. But this is a difficult trade-off. Central banking has lost a good deal of credibility already. To launch a promotion that makes central bankers seem even more foolish in order to set the stage for a global currency risks undermining one promotion for the sake of another. How is this a positive trade off?

The problems go well beyond Britain, of course. It is a kind of double slam. Central bankers have been forced to admit that they did not foresee the Great Recession. Now, in Britain, America and the EU, recoveries continue to recede and the good, gray wise men of the modern economic state continue to have no answers. In America, especially, the world's most powerful central banks – and its bankers – seem helpless to address the crisis. Just yesterday the news turned even grimmer, with announcements by the Fed that the economy was not in fact improving. Here's an excerpt from an ABC Internet report on the subject:

Economic Slowdown: Federal Reserve Vows to Help … Fed's Decision to Buy Treasury Bonds Raises Worries of a Double Dip Recession … The Federal Reserve's words made it clear today that it is concerned about the slowing pace of economic recovery. Unemployment remains at 9.5 percent. What does it mean for the jobless? "Today's statement was about as worried a statement as I've seen since, well, we were back in a recession," said Moody's chief economist Mark Zandi. At the end of a one-day meeting of the Federal Open Market Committee, the Fed's top policymakers released a statement saying that new information "indicates that the pace of recovery in output and employment has slowed in recent months." – ABC News

We have no idea what is going on in the well-appointed back rooms of central banks around the world. But we do believe that the powers-that-be must worry continually about the economic climate and the potential for backsliding. A managed financial crisis is probably to the benefit of the elite as it makes the general populace more malleable. But a prolonged and vicious Great Recession, or even depression of sorts is probably a bridge too far. There is already considerable unrest – certainly in America and parts of the EU as regards the economy – and further disarray will lead to further fundamental questions about how democracies provide for their citizens.

It is certainly within the realm of possibility that confidence in central banking gradually fades among the general populace if stagflation takes hold (a good possibility) and employment continues at its current dismal pace. Since the banking establishment, probably through panic (at least to a degree) has made the orderly unwinding of the larger economy an impossibility, we would expect both stagflation and unemployment to be factors of economic reality for the foreseeable future. And of course deleveraging too has a role to play in certain sectors.

After Thoughts

Generally, Western economies are going to be in for a miserable time, we predict (as we have before). So, we would believe, are the central banks and their bankers. This is a probable reality that has great import for Western economies and challenges how they are organized. If people do lose faith in central banking after more than a century of implementation, then something else, somehow, will have to take its place. The elite, even if it wishes for its promotions to persist beyond all logic, will eventually concede that what worked in the 20th century does not work in the 21st. This is likely a significant development and bodes well for the future of honest money – gold and silver.

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