Central Banks’ Role Will Greatly Diminish In The 21st Century

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If necessity is the mother of invention, let’s take a look at the “need” that gave rise to concept of the central bank, that mysterious, ivory tower bastion of presumed economic stability that seems to dictate many aspects of our everyday life.

The first central bank was the Bank Of England, and the need that created it in 1694 was a capital requirement for ¬£1.2 million to help fund the Nine Years’ War with France.

Come to think of it, The US Federal Reserve performed a similar sleight of hand in 2008 at the onset of the so-called Great Financial Crisis, as well as throughout and beyond its duration: the famous, or infamous, Quantitative Easing was really nothing more than the temporary creation of additional money supply to shore up the faltering capital models of various banks.

The rest of the time, central banks carry on the self-appointed task of “guiding” national economies down a stable and relatively crisis-free path. This model may seem benign on the surface. But, when chaotic circumstances rear their ugly head at the most inopportune times, no model that claims sophistication in matters of economic stability can do much better than the pure dynamic forces of the free market.

There is one other aspect to central banks’ role these days, and that is to put forth rules and propose legislation to regulate and curb the darker, greedier tendencies of the free markets in general and overly-opportunistic banking interests in particular. This may be the only real non-invasive benefit of a central bank.

Central banks have been notorious for intervening in national economies when it appears as if the various possible outcomes of chaotic developments threaten to put their self-anointed duties as sole arbiters of the greater economic good at risk. The thinking goes something like this: A chaotic event causes the collapse of certain markets or asset classes, which in turn threatens to ruin individual businesses and even whole industries. The inevitable result is widespread and protracted unemployment which puts downward pressure on the economy and causes recession or even depression. Often, central bankers are blamed for not doing enough to stabilize the economy during these catastrophic shifts of supply and demand.

When chaotic circumstances rear their ugly head at the most inopportune times, no model that claims sophistication in matters of economic stability can do much better than the pure dynamic forces of the free market.

In present times, central bankers have taken it upon themselves to avoid being blamed and labeled as unfit supervisors of the economic good. After all, they’re not mind-readers. They can’t possibly be expected to engineer a stability framework that features a mechanism for every possible calamity, known or unknown, that might cause the economy to go awry.

This conclusion yields a new and very interesting question: If a central bank is merely capable of keeping the rich richer (as long as they don’t get too greedy), what or who remains to address the broader, more macro tasks of developing schemas that encourage socio-economic fairness and equality, real and tangible growth, and prosperity, charity, and compassion for all?

The only component available to do this well is a self-regulated private sector that is able to articulate its intentions through the supply-demand dynamics of robust and unimpinged free-markets.

For too long, fear has been the elephant hiding in plain sight in the halls of finance and policy. Fear leads to an unspoken, almost subliminal presumption of lack of confidence; we must continually be on the lookout for what can go wrong with the decisions we’ve made, and we must be at the ready to do, as ECB president¬†Mario Draghi stated in 2012, “whatever it takes…”

This may sound reasonable at first, but if central bankers expend all their energy continually looking only for what can go wrong and exhausting their resources attempting to reign in rogue industrial interests to placate ideological and financial supporters and participants, there simply is no energy left to nurture and develop all the things an economy requires for a totalizing approach to wholistic and sustainable stability and growth.

If a central bank is merely capable of keeping the rich richer, what or who is left to address the broader, more macro tasks of developing schemas that encourage socio-economic fairness and equality, real and tangible growth, and prosperity, charity, and compassion for all?

Central banks’ role will greatly diminish in the 21st century. In today’s postmodern era of globalization and corporate self-actualization in areas such as community outreach, equality and parity of pay, benefits and employee housing, as well as the gradual migration to pro-distributive prosperity models, and a genuine attitude of self-regulation and moderation, alternative private sector banking and other capital frameworks in every sphere will begin to develop and emerge (actually, they’ve already begun!). These diverse yet cooperative and collaborative systems will be much more able to balance the risks and absorb the costs of guiding the economies of nations, thus relieving central banks from this inordinately heavy burden.

I can just see a regional Fed operative clamoring to make a rebuttal, “What you’ve described is what we already have!” That’s odd – I’ve not received any emails inviting me to the next FOMC meeting. And, I wouldn’t attend anyway. For, I have numerous fundamental disagreements with today’s banking system and central banks’ urges to somehow attempt to manipulate the factoral causalities of inflation. I’ll take my solution as a starting point and send out my invitations when the model is ready for prime time.

History is overflowing with cautionary tales of how well-intended systems grew to become so large and complex that they collapsed under the weight of their own enormity. The very same can be said about the concept of the central bank, and it is high time to put the reigns that guide global economic stability and growth in the hands of many, rather than the hands of a presumptuous few.

Another financial crisis looming on the horizon?

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It has taken the U.S. economy five or six years to have any kind of hope of recovering from the financial crisis of ’08. And it would have been a much tougher go, if central bank easing had not been as aggressive.

But, easing in any form is really not a solution at all; it is merely a band-aid that does nothing to rid the patient of the infection of greed.

A soft landing by any other name is still a soft landing. And, as the U.S. Federal Reserve now seeks to guide the economy onto a less risky, more stable trajectory, unexpected free market shenanigans loom at the margin to threaten economic stability and growth.

Let’s start with oil. Anti-U.S. fracking interests have begun the first round of sabre-rattling which has resulted in a spectacular drop in the price-per barrel and the price-per-gallon at the pump.

At first glance this might appear to be a blessing for the consumer. And, it would be just that if oil prices can stabilize at or around the $60 level. But, many traders, myself included, tend to believe we have at least $10 or $15 to go before all the speculative selling will be exhausted.

Wherever oil prices ultimately settle and form a stable base, it will not be a protracted affair. We will probably see a return to the mean sometime in the last half of 2015.

Thus, the weaker fracking interests that some analysts have predicted would be forced to shut down both development and production operations will likely not have to do so en masse. Only a few may get pushed out, and whatever recessionary pressures that were caused by a slowdown in Shale development will ultimately ease, and the industry will be able to resume it’s long-term plans.

As oil analyst Jim Veire pointed out at our recent family gathering on Christmas eve, The credit card banks take a punch on the chin by way of a substantial decrease in merchant fees from gasoline retailers. With prices at almost half of what they were a few years ago, credit card fees paid by the gas stations are also sliced in half. This will inevitably weigh on the sector for the next year or two.

But the bigger story here, if also the more stealthy one, is the U.S. Dollar. It’s meteoric rise in the past few months poses a much greater threat to the U.S. recovery than either the oil or banking story.

As FT columnist Gillian Tett wrote in the December 18 issue, emerging market companies, particularly in the so-called BRIC group of countries (Brasil, Russia, India and China), are loaded up on over US$2 trillion in offshore debt, just over 70% of which is denominated in US dollars. For example, firms based in Russia where the rouble has taken a pounding in recent months, now find themselves in a rather pronounced currency squeeze that becomes difficult to service.

Another twist to the tale is that the structural weaknesses caused by this currency imbalance are not at all likely to show up clearly on companies’ balance sheets because much of the debt is in offshore accounts, sometimes under names that provide no clear linkage to the parent firms.

Further complications arise when the offshore cash is converted and repatriated to the parent’s country. It then is able to be labeled, in many cases, as foreign direct investment.

We all know what eventually happens to share prices when companies use accounting tricks to obfuscate the truth. And, when the debt gets serviced in an awkward and less well-planned fashion, other expenditures will surely suffer.

This all translates to more than a trivial threat to the US recovery as global demand, which is already in intensive care, could get another more widespread and protracted version of the 1997 Asian financial crisis.

So, while you might think the wrong debt decisions made by some emerging market companies will not effect your accounts stateside, don’t be surprised when the raging, if aging, bull run enjoyed by equities takes several months or more off to catch its breath.