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Central banks drive booms and busts, and force everyone to be a high risk speculator

It doesn’t have to be this way. The most important price in our economy is set by a bunch of bureaucrats. They are unelected and unaccountable. But your day to day life is affected by their decisions, as well as your ability to buy a house or for your retirement savings to maintain their value. Some people are wiped out by a mere phrase in a memo. There is a deep Soviet style management program at the centre of all Western economies. It’s time we talked about that ogre.

Maurice Newman, former chair of the Australian Stock Exchange (ASX), writes in The Australian about the defining invisible issue which is rarely discussed — our currencies, our central banks:

Vladimir Lenin advocated: “The best way to destroy the capitalist system is to debauch the currency.” True or not, we seem hellbent on finding out.

Dark times are coming:

The BIS has rung the alarms. We are warned that the world’s most reckless monetary experiment, which has taken interest rates to the lowest in recorded history, is failing. Central bankers remain silent, not knowing how or when to end what they began, while the political class simply looks on, impotent and mired in its own economic mistakes.

This leaves only the market’s invisible and heavy hand to make the required adjustments. What follows will be indiscriminate, unpredictable, socially far-reaching and, politically ugly.

Central banks drive the economy at breakneck speed

Central banks keep interest rates artificially low. This pumps up a sick economy, by effectively “printing” money. (Technically, it makes money cheap to borrow into existence creating bank “credit”). This is a gold plated Christmas present for high risk speculators, but it’s taken from people who work for their money.  It’s like toxoplasmosis for savers — their savings are silently eaten away by inflation as borrowers outspend them with money they did not earn. Savers have to adopt high risk behaviours to stay afloat and keep their purchasing power from sinking in a river of money.

Easy money generates cycles of boom and bust that wipe out life savings. No one can do hourly work for 40 years, then live off the pitiful interest paid on the money saved. Instead everyone has to “invest” and speculate whether they like it or not. And thus do local councilors get eaten by Goldman Sachs traders for breakfast. What kind of culture do we want? Easy credit favours aggressive takeovers, and hostile, predatory market behaviour. Central banks control so many aspects of our lifestyle, yet we can’t vote them out.

More bad debt can’t fix a problem created with bad debt

We’re up to the third round of bubbles. The addiction to easy credit has reached the end stage when each injection is almost impotent. Printing money doesn’t create euphoria, or even growth, it just puts off judgement day.

“…thanks to the co-ordinated actions of the world’s central banks we’re heading for an economic and financial disaster, probably worse than the last…”

“Incredibly, for the third time in 15 years, we’re back in a financial bubble searching for a pin. “

Mises should be a household name, an economic hero, but his theories, so prescient, don’t benefit power hungry politicians, nor bureaucrats, nor bankers:

Austrian economist Ludwig von Mises was one of the few to predict the 1930s Depression. In The Trade Cycle and Credit Expansion: The Economic Consequences of Cheap Money, he wrote, “The depression is the necessary process of readjusting the structure of business activities to the real state of the market data … The depression is the first step on the return to normal conditions, the beginning of recovery and the foundation of real prosperity based on solid production of goods and not on the sands of credit expansion … If one does not terminate the expansionist policy in time by a return to balanced budgets, by abstaining from government borrowing and, by letting the market determine the height of interest rates, one chooses the German way of 1923.”

We need a free market in money. Interest rates should be set by lenders according to risk, and they should not be “guaranteed” by taxpayers.

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