YOUR MONEY

And the Truth shall ... be ignored

The last 3 weeks have been full of news re: Central banks and their governors. 

Ben Bernanke’s term is up and it is unclear if President Obama will ask him to stay on.  Mark carey has already abandoned the ship of Canada and should be delighted to go to the U.K., especially as its Finance Minister just recently announced the Bank of England will be allowed more ‘latitude’ and ‘tools’ to revive the British economy. (So much for arm’s distance central bank independence for England!)

The BRICS – Brazil, Russia, India, China and South Africa – the best of the best in the ‘developing world’ have announced this week they will be forming their own, central bank, independent of the World Bank and the IMF (International Monetary Fund) headquartered in Washington. If they can agree as to where the headquarters will be, what exchange rates and regulations to employ, it is hoped this new,  breakaway bank will be up and running in 5 years!

And, oh yes, the new prime Minster of Japan has gotten his way as promised in the Japanese elections.  His government and new Bank of Japan appointee are committed to spend, spend, spend to get Japan’s economy out of ‘decades long‘ recession.  Their target will be 2% inflation.  Not keeping inflation to under 2% as is the primary and stated goal of the central banks in the U.S., Canada) and the EU, but to inflate the economy from its decades long deflation to 2% or higher inflation! (See G&M, March 2, 2013, B8, “New BOJ chief calls easing ‘indispensible’”).

It is therefore refreshing amid all the quantitative easing that is flooding the West and Japan will free money and growing national debt, that one man again has stood up and spoken the truth.

Masaaki Shirakawa, the newly replaced head of the Bank of Japan, at his final media scrum, said the following (G&M, March 20, 2013, B8, BOJ chief takes final swipe”):

“[P]ast figures in Japan as well as in Europe and the U.S. show that the link between monetary base and prices had been broken. [my italics]”

“If influencing expectations refers to the notion that central banks can use words [my italics] to control markets in the way they want, then that is dangerous.”

 

“If there was one single measure that would have resolved the problem, just like clearing a fog, then we wouldn’t have been in this state for the last 15 years.”

 

Put briefly, central bankers can only do two things to affect economic change:

1. increase or decrease the amount of money in circulation by means that are indirect and only trickle down to the real world marketplace of consumers and industrialists.

2. make bold speeches to scare people into complying

 

As he points out, in his first quote, these two ‘tools’ no longer work, and have not worked in Japan for over 15 years, and they are not working in the U.S. and Europe. Billions of dollars and yen of cash infusion into the banks has not led to factory growth and new jobs, nor encouraged ‘consumer demand’ through spending by individuals and families.

 

Major corporations are sitting on billions of cash in their vaults, leaving the stock exchanges to a few IPOs seeking a fast buck from the naive public, desperate (but hopeful) pension and investment funds and general buy and sell speculators.  It no longer is the main source of cash for corporate growth as a recent UK study has shown.

 

National, provincial/state debt is massive so there is little room to ‘spend more’ on new things or even established needs without massive tax increases or ballooning federal debt and mortgaging the future for the next 50 to 100 years!  (And no politician will survive the next election on massive tax increases – so it’s almost a non-starter.)

 

And individual and family debt has become so high in the West that even a rise in mortgage and other loans rates -- by 1% to 2% -- could cause mass bankruptcy.   Too many people in the west have been spending and buying like crazy for over a decade, lost much of their savings in the crash of 2008, and are hanging on – barely – with inter- bank prime at 1% or less since 2008.

 

So, Mr. Shirakawa is right and telling the truth; truths  governments and central bankers and stock markets do not want to admit.

Our capitalist model is broken, and the power of the state to direct the economy is wishful thinking.    

 

And churning out more and more government ’money’ is not only ineffective and unproductive, but insanity and the path to national and international bankruptcy!!!