• Interest Rate Manipulation and Loose Money Promote Economic Collapse

Few people would compare downward central bank interest rate manipulation and loose money policies to Soviet style command economics. But I do. And I suggest that if these policies continue for much longer, it could lead to an economic collapse, something approaching that of the Soviet Union’s in the late 1980s. Consider the outcomes for the United States of excessively low interest rates and loose monetary policies in recent years fostered by the U.S. Federal Reserve:

• A real estate boom and bust, with massive over-building.
• Discouragement of savings which fell to all-time lows relative to incomes.
• The taking of inordinate financial risks.
• The creation of excessive debt, particularly by consumers.
• The expansion of total debt far faster than either GDP or income.

Furthermore, the Japanese experience with many years of zero-based interest rates and easy money has enormously compounded its economic problems. Here is the situation in Japan today:

• Japan cannot raise interest rates in any meaningful way due to its gargantuan public debt. To do so could bankrupt the nation. The country is trapped into lower rates.
• Until recently, Japan had become the financier of ultra cheap plentiful loans that artificially boosted global asset prices. The so-called ‘yen carry-trade’, and, its recent collapse has helped crush global asset values.
• Zero-based rates combined with major monetary expansion smashed down Japan’s exchange rate, making imports expensive and discouraged balanced domestic consumption.
• A ‘cheap’ Yen gave Japanese exporters an unfair trade advantage relative to other developed economies, particularly that of the United States.
• Japan has failed to pull itself out of an almost twenty-year slump.
• Japan has produced a situation of significantly diminished resources to fight its present downturn, not only due to the enormity of its government debt, but also because of deteriorating savings in recent years and lack of domestic consumer demand.

With central bank rates of zero per cent proving inadequate to get individuals and companies borrowing, and banks lending again, governments now seek to lower their bond yields. Thereby rates for mortgages, auto loans, consumer loans, etc., are also manipulated down, hoping to kick-start consumption. Hence, the U.S., Japanese, British and other central banks are engaged in a massive ‘printing money’ exercise to buy huge quantities of their respective governments’ bonds in an effort to lower their bond yields and create the easy money. Such policies usually have the following outcomes:

• If successful, debt levels go from really bad to extremely bad!
• Short-term artificial demand stimuli distort longer term supply/demand relationships. Look what has happened to the American auto industry arising from zero-cost financing a few years ago. It appears that much of the increased sales was at the expense of future consumption and has helped shape the horrendous situation for the industry today.
• Financial and economic imbalances mount, producing an ever more unstable economic environment. As Stephen Roach, Chairman of Morgan Stanley Asia, wrote on March 10, 2009 in the Financial Times, “Policies are being framed with an aim towards recreating the boom. Washington wants to get credit flowing again to indebted US consumers… It is a recipe for disaster.”

Economies with excessively loose monetary policies and who force interest rates to ultra low levels for extended periods of time eventually succumb to a massive top-heavy debt structure which at some point ‘topples over.’ These countries then suffer either a deflationary debt implosion/depression in which much of the debt is liquidated, or the country’s central bank instigates a huge inflationary push to reduce the value of all credit market debt in the country by vastly increasing the amount of currency and the expansion of its money supply.

A big inflationary push frequently leads to a lack of confidence in the country’s currency and hence the possibility of ‘hyper-inflation’ occurring as everyone unloads the country’s currency for real goods or other currencies. Argentina earlier this decade and Zimbabwe recently, are examples of central bank sponsored inflation that led to no confidence in their currencies, resulting in hyper-inflation. The inflationary approach is what appears to be favoured by the American, Japanese and British central banks.

From an Enlightened Economics perspective, the actions of manipulating down interest rates and the over printing of money by central banks fall under a terrible fallacy: the belief that we can resolve our short-term economic problems by going more into debt and not concern ourselves with the long-term consequences. A global consciousness has to arise which understands that manipulating markets, most especially interest rates and money supply, leads to highly unstable economies which in time either implode or explode!

Sometime in the next few years we will again learn history’s lesson concerning long periods of ultra-low interest rates and loose money. And the lesson is that by artificially enforcing such policies for extended periods of time leads to an inevitably unwieldy mammoth debt structure that eventually crushes the economy. As I mentioned at the beginning of this piece, it is comparable in my view to that of the Soviet command economy which finally imploded after trying for decades to make it work.

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• Out of the Ashes. A Global Central Bank!

Our financial overseers will create a world central bank in the next few years. Growing higher consciousness in the world will enable it to become a reality. This bank will have a mandate to monitor, regulate, and maintain global currency, credit, and debt issuance. It will ensure that growth of these activities roughly matches global economic output. It will come about as the chaos and inadequacies engendered in our present monetary system become evident to everyone and a world central bank seen as the best solution.

Individuals and groups in financial markets everywhere, lacking inner fulfillment, have demonstrated inordinate greed resulting in reckless financial games and gambling – are bringing the financial system to its knees.

Such mismanagement in the financial system, I believe, will require the new world central bank to disallow banks everywhere from continuing in unfettered debt creation and speculative excesses. In search of ever higher returns, banks created overly lax lending standards, highly leveraged loans, obscure financial entities bearing major financial risks unconsolidated in their financial statements, and generally ran down the quality of their assets and reserves to unsafe levels.

‘Shadow banking’ system larger than conventional banking
All the while an even bigger, massively leveraged, totally unregulated, thinly capitalized, ‘shadow-banking’ system was allowed to balloon by bank regulators. And it is now in the process of imploding! Bill Gross, managing director of PIMCO, the world’s largest bond fund, said this recently about the shadow banking system: “Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.”

Due to the enormous growth of irresponsible central bank and banking activities globally, plus the vast, mushrooming credit creation of the shadow banking system – the world’s money supply is expanding out-of-control.

Unprecedented money supply growth creates inflation as bad as 1970s
Globally we see that, “China [is] registering an 18% plus growth in money, India 22.4% a year growth, Singapore 14%, Britain up by 12.3%, Western Europe 11.5%, Australia 16%, Canada 13%, and Saudi Arabia 22%!” So says The Mogambo Guru, Richard Daughty. These are ‘broad money supply’ figures. John Williams of www.shadowstats.com shows the US broad measure of money supply, as of early February 2008, increasing at annual rate of 16.8%. (The US Federal Reserve stopped publishing this measure in March 2006 claiming it costs too much to produce. Many economists suspect that they just wanted to hide the ramping-up of the US money supply.)

Even Marketwatch’s chief economist, Irwin Kellner, is concerned about US money supply growth. He said recently, that, “The rate of growth for highly liquid funds which the St. Louis Fed calls MZM [i.e. physical money, checking and money market accounts, etc.]… soared by an annual rate of 22.7% between December 24, 2007 and February 18 of this year.” He adds, “… it has created a whole lot of inflation.”

The link between an expanding money supply and inflation is firmly established. As the Bank of England’s Governor, Mervyn King quoting a highly respected study, said, that “Over the 30 year horizon 1968-98, the correlation coefficient between the growth rates of both narrow and broad money, on the one hand, and inflation, on the other, was 0.99.” Thus in the words of Milton Friedman, the recently deceased Nobel Economics prize winner, “… inflation is always and everywhere a monetary phenomenon.”

In the US, consumer price inflation using the politically biased, understated, consumer price index (CPI-U) is in January 2008 up 4.3% from a year earlier. But using the CPI methodology as of 1980, it is almost hyperinflationary at close to 12%! Inflation in China is now running at 8.7%, while in the EU and the UK, though more moderate at 3.4% and 3.1% respectively, it is picking-up significantly and well above their respective central bank targets.

The foregoing suggests that the present global monetary and financial system is reaching a state of extraordinary instability. The danger is the possibility of rapidly growing, unstoppable inflation culminating in a hyperinflationary episode such as is now occurring in Zimbabwe. Or, a threat of a deflationary bust similar to the Great Depression.

Higher consciousness the only real answer
The only real answer to such economic threats is higher global consciousness. This, I am convinced, will gain traction. (See my post, The Missing Ingredient In Economics — Consciousness!). In future years, this higher consciousness will, amongst other things, first manifest itself by allowing our financial overseers to see the need for, and create, a world central bank.

In ages past central banks utilized gold to help create monetary order. A new world central bank might well find a role for gold again, but in an updated, modern form. I will write about this in another post.

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