Central Banks, The Central Problem

Central Banks, the Central Problem

So far I have asserted that much of our own political and economic problem (the two cannot be divorced) lay at the feet of our financial and banking system, not that our various local, state, and federal governments aren’t to blame. I see the occasional Libertarian screed about too many laws, too many regulations, too much government, and the like, well, I just shake my head and wonder if all these adherents to such a political creed believe that all one need do is go into the wilderness, stake a homestead, clear the land for fields of crops and live independently for the rest of their lives, or at least until we have to put them in nursing homes. Sorry, kids, that ideal died a century ago. No, we have to play the hand we are dealt and the hand ain’t worth a damn unless you lay it down.

Now you might be thinking why Central Banks might be a problem. Easy, banks and bankers are the guardians of a nation’s money, not politicians. How many times have we seen politicians rally to pass legislation to reduce the size of government and its spending? I’m waiting, anyone, Bueler? Back in Washington’s day Hamilton led the charge to create our first central bank while Jefferson rallied the troops against it. The argument was a simple one, who pays the debts of the nation? The answer from the respective states was, “Not me”.Well, the federal government could always collect excise taxes but first we had to have commerce with foreign nations and that requires a national currency, not IOUs from the various states and the merchants within those states. Growth in our early years was made difficult by not having the usual functional units of state such as a central bank. Yes, the first one was signed into law but was quickly sold off to private interests having accomplished little as a bank. The second attempt at securing a central bank ended when its charter was not renewed. One criticism was that it was privately owns but publicly responsible to congress and the President. Again, it wasn’t much of a bank. So America was left to the tender mercies of private banks and trusts. At least the U S Treasury created currencies, both coin and paper. But financing the various governments within our borders was left to private hands, and as we know, money tends to corrupt.

The Federal Reserve Bank is privately owned by all the banks in the United States and only the Chairman and the assistant chairman of the Fed are appointed by the President and approved by the Senate. We still have no ‘Central Bank’ as almost every other country in the world has. Even the Bank of England is owned by the London banks. So the question becomes, just what should a Central Bank, owned by its state government do? In the Fed’s case it has two legal mandates: the first is to control inflation; the second to control amount of currency in circulation, usually through a combination of interest rate administration, private bank reserve accounts, inter-bank borrowing, the discount rate, and a few other little items. It is also the lender of last resort, especially for the U S Treasury. The Bank of England has similar duties and a few different ones. As for the rest of the world, the ‘problem’ central banks, they are the captive of their respective governments. In essence, the politicians control the cookie jar. Some of you may remember my discussions of monetary policy and how that is usually done by three actions. The first is interest rate administration, the second is money supply through credit, and the third is government spending. When the central government directs investment in both government projects and private industry, politicians assume they know risk allocation better than the bankers. And when they are directed by a super central bank like the ECB, to buy the bonds of the various member states even if those economies are failing, well, what me worry? The European Union is now at the edge of a financial cliff that has such a steep drop that all the money in China and all the money in the United States could buy its way out of severe depression.

Without the Fed we could never have financed our part of WWI, the TVA project, the Hoover Dam (begun before FDR’s presidency), WWII, NASA and our multiple trips to the moon, and the Vietnam War along with the war on poverty. Because in each case, those projects were financed with borrowed money, meaning Congress over spent its checkbook. The old joke about how my bank account can’t be empty, I have checks left applies to Congress. So where does all this money go? Usually it goes for goods and services and if there is too much spend on goods and services we see a rise in the cost of our lining expenses, that’s called inflation. The problem becomes when that spending starts to be the tidal wave of rising prices as happened in the 1970s and by 1983 inflation was peaking about 10% or better., interest rates went to over 16%. With the current spending by Congress, this last ‘trillion’ was judicially spent mostly outside the country. When we look at where the money went, very little was given to the people to spend on goods and services. Most went to NGO, political organizations, billionaire bank accounts for further investment, and foreign governments. I am certain Biden made sure that the Palestinians got their share in high inflation for basic goods and services.

Manufacturing and imports deflated slightly so we saw minor inflation in the cost of living except for housing. We will see more of that in this coming year but it will even out as it always does. We may even see a retrenchment of home prices and values in the coming years as the housing price bubble bursts. By the way, no group of world class investors has enough financial where-with-all to buy all the housing in America, not even close. But all this proposed infrastructure spending that is really social giveaways will threaten us with hyperinflation not because we are printing money but because it put more money (currency and credit) in the hands of more individuals who will be competing for more goods and services without an increase in their immediate production. It will happen because the Biden administration and democrat party directives will cause loss of productive jobs in manufacturing while discouraging Chinese imports, thus creating shortages of goods and driving up prices. This is your Green New Deal, the productive jobs will only come in twenty years if at all.

Meanwhile, one topic I have written about many times before is still hanging over our head like the sword of Damocles, waiting to cleave our economies world wide. Derivatives, that engineered financial time bomb waiting to explode. Now why in God’s name did we ever permit such financial weapons of mass destruction to be created, let alone exist? And like pretty flowers they come is all shapes and sizes. Thee are several good website to go explore if you wish to know more. And no, digital crypto currencies will not save you, don’t even think about.

Now if it makes you feel better, the end of the world will be a foot race between the EU and China. Demographics are against both and that goes for Russia as well. By 2030 China and Russia will have turned the corner and their populations half their respective populations will be over the age of 60 and that is serious business. Economies grow through consumption, that is, they consume what the produce. If they produce more than they can consume then they have to export to make up the difference, and if they use strategies such as selling below costs, devaluing their currency, restricting imports, and the like, they run themselves into the ground economically. Eighty-five percent of the Chinese energy needs come from oil and natural gas, of which the Shanghai region has literally a one day supply for the year. Most of that supply comes from the Arabs, anyone who will sell to them. If the Chinese want to start a war we simply cut their oil and gas supplies and within a few weeks they will be hollering Uncle. Their economy will have come to almost a complete halt.