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Central Banks are Pushing Monetary Heroin to Addicted Economies

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Joel BaumanThis article was submitted by Joel Bauman, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

We hear a lot about the role of central banks in the world’s economies. But what exactly have they been doing over the last few years, and what has the actual impact been?

Central banks have the authority over the interest rates and the quantity of a nation’s currency. Their official responsibility is to regulate price stability. By law some central banks, such as the Federal Reserve, operate under a dual mandate and must also promote full employment. Central banks hold the reserve assets that support the integrity of their issued currency.

The Federal Reserve holds the enviable position of being the issuer of the world’s primary reserve asset, the Federal Reserve Note, also known as the United States dollar. The Fed, in many ways, has led the charge in terms of the size and scale of unorthodox monetary policies practiced over the last few years. The impacts of these monetary policies are incredibly profound, and the world will soon see the true extent of their economic consequences.

Basically, the Fed and other central banks have played the role of a drug dealers pushing more heroin on addicted economies.

Shortly after the global economic slowdown of 2008, we saw massive surges in currency debasement. Central banks of the world have been practicing unprecedented levels of monetary expansion ever sense. A large degree of the foreign currency manipulation outside the United States has been driven by the Keynesian “beggar thy neighbor” economic policy. In this currency war Keynesian economists believe the greater a nation’s currency devalues relative to other currencies the greater competitive advantage that nation holds in exporting. This mentality is mercantilism at its finest.

But monetary expansion by the Federal Reserve has been less about debasing the dollar relative to other currencies and more about promoting asset prices, specifically the prices of stocks, bonds and real estate.

bernanke smiling

In December of 2008, the Federal Reserve under Ben Bernanke responded to the financial meltdown by implementing a zero interest-rate policy and initiating a monetary expansion plan referred to as Quantitative Easing (QE).  This first wave of QE included a $600 billion purchase of mortgage-backed securities and agency debt. Since then, there have been two more rounds of QE. The Fed officially started the QE program for the following reasons, according to a Ben Bernanke Nov. 4, 2010, Washington Post op-ed:

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

The Fed purchased mortgage backed securities, as well as Treasury bonds, in order to lower interest rates. The effort was meant to encourage investors to seek riskier assets such as corporate bonds, and stocks. This is all based on what is known in financial circles as portfolio balance theory. The inevitable rise in asset prices supposedly promotes a “wealth effect,” which increases spending and consumer confidence. The increase in aggregate demand from this wealth effect is what the Fed claims will stimulate new production and economic expansion.

The Fed took full credit for the lower unemployment rates. “The first two rounds of LSAPs (large scale asset purchases) may have raised the level of output by almost 3% and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred,” Bernanke said.

With the end of QE3 in late October 2014, there has been a large degree of cheerleading from various business news networks, economic articles, and investment strategists. Voya Investment Management claimed, “There should be no question that QE3 initiated in September 2012 and expanded in December 2012 to $85 billion per month was a success.” In fact, many say there hasn’t been enough QE.

Through 2014, the primary concern expressed by mainstream economists was that the world may suffer deflation. In a news conference in the summer of 2014, Mario Draghi, president of the European Central Bank, was asked about the deflationary threat to the euro currency. “We decided on a combination of measures to provide additional monetary policy accommodation and to support lending,” he replied.

Just a few weeks after Draghi dovish declaration, Bank of Japan’s Kuroda reaffirmed his dovish position saying “ready to ease more” after being asked how the BOJ will fight deflation. Janet Yellen, has acknowledged many times that deflation and potential liquidity problems are the biggest threats to a full recovery.

Central banks have always taken on the responsibility to “fight inflation,” but this is the first time in history where central banks around the world have been proactively fighting deflation in order to maintain economic stability and promote growth. Peter Schiff has said very clearly in his podcasts that we are not experiencing economic growth.  It’s hard to deny this fact after analyzing our poor GDP output and weak macroeconomic numbers.

The QE program has been terribly unsuccessful and has only temporarily held back the symptoms of our increasingly sick economy. The economic disease is getting worse and the symptoms are showing up again. The Fed will have to engage in another wave of monetary easing in the form of QE4, an economic stimulus package, or even as Dickson Buchanan pointed out in his recent article, negative interest rates, which have already been plaguing Europe, and now Japan.

Regardless of which tool the Fed uses, they will have to keep injecting their monetary heroin in an effort maintain this false illusion that we are in a legitimate recovery. The ultimate price the Fed will pay for this unprecedented monetary policy is the value and integrity of the world reserve currency, the United States dollar.


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3 thoughts on “Central Banks are Pushing Monetary Heroin to Addicted Economies

  1. Eisenfeld Michel says:

    OK; they are intoxicated but why would they stop ?
    They have all the drug they want for free, so they can go on indefinitely like this .They won`t stop because they would not accept to suffer the pain so they will an can go on for unlimited time.

  2. jrj90620 says:

    I believe what the Fed is doing is just a symptom,not the cause.It is the result of voters demanding more from govt than they are willing to pay in taxes.That results in deficits,which the Fed monetizes.Otherwise,interest rates would soar and we would suffer the immediate,visible, negative results of deficits.The Fed hides those negative consequences through gradual currency devaluation.What we need,is limited govt,so that voters lack the power to cause this mess.I don’t see any signs of that happening.In fact,with fascist minimum wage laws growing and the popularity of Sanders,we are going to more govt growth and wealth destruction.

  3. Robert Greenwald says:

    Good article, and it is a testament to the idiocy of modern monetary policy and fiscal policy to cause us all to use doublespeak. The problem as U point out is that Lord Keynes was a drug pusher and the Austrian economists believed in Monetary Health sans drugs.

    Only with doublespeak can countries so loaded with inflation C or worry about deflation. U C Austrians would say that deflation is important as it makes money more valuable thereby in relation to the products it would purchase, those products became less expensive.

    In medicine most addictive behaviors R considered unhealthy and most religions (if not all)preach the virtue of saving for when savings R needed. BUT governments R creating negative interest rates for only one purpose and that is to discourage savings. But people without savings R slaves to the government that forced that behaviour.

    Gold may not make U rich, but it will let U feel honest and non addicted. It has been considered a form of money for more than 5000 yrs and so one has to be suspicious of government motives that ignores that simple fact, and tries to makes its citizens addicted to fiat paper.

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