As the global economy faces increasing scrutiny, a growing consensus is emerging that all may not be well. Politicians, central bankers, and news anchors can no longer maintain the illusion that everything is running smoothly. The script they once adhered to is becoming harder to follow.
Who could have predicted the surprising popularity of figures like Donald Trump and Bernie Sanders as presidential candidates? Yet, here we find ourselves during the primaries, surrounded by the ubiquitous ‘Feel the Bern’ bumper stickers that resemble elements of street art.
Economic experts confidently forecasted a new era of prosperity defined by 3 percent GDP growth, 2 percent inflation, and 5 percent unemployment. The origins of these benchmarks remain unclear, yet it is evident that those in charge are failing to meet them.
The public is beginning to recognize that the promised economic bliss is far from reality. Many are questioning whether the individuals leading our financial systems truly understand their roles. Observers now realize that trying to wish economic prosperity into existence through interest rate manipulation is as futile as attempting to cure a headache by banging one’s head against the wall.
The damage, unfortunately, has already been inflicted. Years of aggressive monetary policies have warped our economic landscape. The bitter truth is that while those who work hard see their rewards reduced to mere survival, others engaged in fundamentally valueless activities, such as repackaging and selling debt, reap excessive profits.
Fabricated Credit Prices
Jim Rogers aptly expressed the situation in a recent CNNMoney interview, stating, “We’re all going to pay a horrible price for the incompetence of these central bankers. We got a bunch of academics and bureaucrats who don’t have a clue what they’re doing.”
He elaborated, “The mistake they’re making is that they need to allow the markets to correct themselves. It’s been over seven years since we’ve had a proper correction in the American stock market. That’s not normal.”
“Markets are meant to correct. Economic slowdowns are part of how things operate. Yet these people believe they’re more intelligent than the market. They are not.”
Attempting to sustain inflated stock prices through relentless issuance of increasingly cheap credit carries inevitable repercussions. Artificially low credit prices generate misleading signals for businesses and investors, leading them to borrow excessively for ventures, such as fracking, that are only viable with oil prices exceeding $70 per barrel.
This mismanagement by central bankers culminates in a tangled web of problems.
Remarkably, they often remain oblivious to the chaos they create. Each poorly conceived solution only leads to an even more absurd predicament. Presently, policymakers are guiding us into darker times.
Welcome to the New Dark Ages
One alarming trend gaining traction among central bankers worldwide is negative interest rate policy (NIRP). Instead of allowing the market to correct itself, they are resorting to measures that border on detrimental. They claim these actions are in place for our benefit.
Perhaps Rogers was too lenient in describing the academics and bureaucrats as merely incompetent; perhaps they are even zealots. They cling to their graphs, aggregate demand curves, and dot plots as if they were sacred texts.
So entrenched in their convoluted theories, they seem incapable of applying rational thought to their practices. Instead, they dig in deeper, inadvertently accelerating the economy toward eventual collapse.
Just recently, Larry Summers endorsed a proposition by his Harvard peer Peter Sands to ban the $100 bill. For context, Summers was the underdog in his bid against Janet Yellen for the Fed Chair position and is now fervently positioning himself for a future role by promoting aggressive interventionism.
In his article, It’s time to kill the $100 bill, Summers asserts, “a moratorium on printing new high denomination notes would make the world a better place.”
Ultimately, what does this signify?
When the link between the dollar and gold was severed during the Great Depression, ordinary workers lost a vital tool to check bank misconduct. Before this break in trust, individuals could convert their savings into gold to counteract banks’ irresponsible behaviors. This right was stripped away in 1933 when the U.S. government halted the conversion of notes to gold and nationalized gold holdings.
Today, like the central bankers of the 1930s, our leaders find themselves in a severe predicament. They must reduce interest rates on reserve accounts below zero to sustain the credit bubble. This approach has already been adopted in countries like Japan, the Eurozone, Sweden, Switzerland, and Denmark, and could soon reach the United States. Ultimately, it is the commercial bank depositors who will bear the cost.
Negative interest rates effectively act as a fee on deposits. In response, depositors could withdraw their money, convert it to cash, and hide it away, circumventing the negative interest ‘tax.’ While this cash wouldn’t hold the same value as gold did in the past, it would provide some resistance against detrimental policy actions.
However, the authorities are maneuvering to strip away this fundamental right. It is precisely this kind of ‘subversive’ behavior that Summers and his ilk are targeting in their war on cash.
When it comes down to it, NIRP and a cashless society would not create a better world. Contrary to what Summers suggests, these tactics amount to outright property confiscation and have no place in a fair society. Unfortunately, like the cessation of direct gold convertibility, this serves as yet another indication that our freedoms are steadily eroding.
Welcome to the new dark ages.
Sincerely,
MN Gordon
for Economic Prism
