Thursday, February 14, 2008

Whore of the World

No institution in modern times is as vile, insidious, corrupt, evil and disgusting as a Central Bank.

It is a whore that has stradled the globe, copulating and spreading its version of syphilis, namely inflation, in an orgy of debt and cheap credit.

The biggest whore of them all, is the Federal Reserve.

Reuter reports that a Depression risk might force U.S. to buy assets. Really? How will this work?

"Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts."

What is so bad about the Fed and U.S. govenment buying a broad range of assets, including stock? Effectively, if the Fed buys an asset, it means that the asset is monetized, or turned into cash for the seller. The money paid by the Fed doesn't exist.

During a normal transaction, a buyer and seller exchanges money for goods. The money used actually exists. It comes from the existing money supply (assuming the transaction doesn't involve credit).

The money offered by The Fed and/or government to conclude the transaction is money added to the current money supply, also known as inflation.

That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.

In the late 1980s and early 1990's Connolly worked for the European Commission analyzing the European monetary system in the run up to the introduction of the euro currency.

"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday.

"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said.

What is so bad about deflation. It corrects the wrong created by inflation. It washes out the excesses and brings the market back to equalibrium.

"While Connolly already sees some parallels with the 1930s, he expects that a more pro-active central bank and government will probably help avert a repeat of that scenario today.

The build up of a credit bubble in recent years was similar to the late 1920s run-up to the Great Depression, he said."



Wrong. The perception that a more "pro-active Central Bank and Government" will avert a repeatof is flawed.

Continued interferance by The Fed and government only postpones and further inflates the inevitable correction.

The Reuters article is based on a worst case scenario and might not even materialise. However, if you catch a wiff of The Fed resorting to these type of tactics, be prepared for a monetary meltdown.

2 comments:

Kevin White said...

Hi, I followed your link from the mises blog, per your request for feedback. I'm not a trained economist but your reasoning seems sound. We need to continue to spread the word about these absurd policies designed to "fix" the economy. My constructive criticism would be to temper language such as "whore" so as to allow for reaching a broader audience and to help avoid being labeled as someone who "isn't serious." Whatever you decide in that regard, keep on writing.

Freemarketman said...

Thank you very much for the feedback Kevin !!!

I appreciate and agree with you on tempering language to avoid being dismissed as a crude author.

However, the term "whore" was used intentionally. Firstly to draw attention to the seedy charachteristics of Central Banks, and secondly to intertwine the heading with the analogy I used to describe Central Banks.

Regards,

Jake