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Catching a Falling Financial Knife

Superheroes of Central Banking Destroying Money By Printing it to Excess

Interest-Rates / Quantitative Easing Apr 24, 2012 - 01:34 AM GMT

By: Adrian_Ash

Interest-Rates

Best Financial Markets Analysis ArticleEccentric yes, but central bankers are a long way from playboy billionaire geniuses with hidden superpowers...

SO CENTRAL BANKERS still can't leap tall buildings in a single bound then.



"Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the US economy," confessed US Fed chairman Ben Bernanke last October. "There's a limit to what monetary policy can hope to achieve," agreed the Bank of England's Mervyn King the following month. "Monetary policy cannot do everything," sighed the ECB's Mario Draghi, speaking to the Financial Times in December.

Okay, so these guys are a long way from that "group of remarkable people" brought together by Samuel L.Jackson's growl "to fight the battles we never could" in the new Marvel Avengers movie. But couldn't they at least wear their underpants outside their trousers?

"Maintaining price stability and financial system stability are important goals of central banks," added Bank of Japan boss Masaaki Shirakawa at the start of this year, "but central banks are not able to solve all problems, especially in an economy characterized by zero interest rates and deleveraging."

Such pessimism surely jars with central banking's awesome powers. A century ago, before the gamma ray accident, "the Gold Standard determine[d] the money supply," as Dr.Bernanke told his George Washington students (and anyone who'd listen on the internet) last month. So "there [was] not much scope for the central bank to use monetary policy to stabilize the economy."

Yet today, central-banking-policy-man still finds himself unable to fix the economy, even though both the cost of money and its supply now lie entirely within his gift. Here sit Bernanke, Draghi, Shirakawa and King – not a laser-glove between them – unable to reverse the spin of the earth on its axis. But they can make it spin faster.

"Of course, the inflation forecast is higher now than it was...precisely because rightly we did more QE," declared Bank of England policy voter Adam Posen in one of two newspaper interviews on Thursday last week. You'll note that word "rightly". The arch-dove of Threadneedle Street, Posen this month failed to vote for yet more quantitative easing – a decision he feels he should come out and defend in public. Twice. Not because anyone thinks he should have printed more money instead, pulling the big lever marked "inflate" to buy more government bonds, push up gilt prices, and drive down interest rates further below the pace of inflation. No, Posen chose to defend his "no change" vote because it was so out of character.

After joining the Bank of England's policy committee in Sept. 2009, Adam Posen voted to expand the UK's money-creation scheme at 16 of the 31 meetings he attended to March 2012. His fellow policymakers backed his call only twice, but that was enough to take the total up to £325 billion – well over 20% of the UK's annual economy, and equal to more than one third of all the UK government debt now in issue.

The effect? Never mind that Posen finally changed his vote this April. As his governor and the other 3 chief central bankers above all confess, creating money and handing it straight to the banks did nothing to fix the economy. But the one sure outcome, as Posen noted this week, was to send Consumer Price inflation sharply higher – well above the Bank of England's official 2.0% annual target in fact, and sharply above its 10- and 20-year averages, too.

Indeed, on the old, more comprehensive Retail Price Index, inflation has accelerated across the board since March 2009, when "quantitative easing" was first applied in the UK. It shot higher from its one- and two-decade averages in 11 of the 14 separate item categories compiled by the official data agency (food, clothing & footwear, household services etc). Excluding mortgage-interest payments, the once-authoritative RPIX index has risen 4.5% per annum since March 2009 against 3.1% since 1992 and 3.4% since 2002.

Is anyone amazed by such exploits? Exploding the money supply can't be guaranteed to destroy the value of cash, as Japan's experience over the last decade shows. But crushing the purchasing power of people's income and savings is a more certain power for central bankers to summon up than anything else. Because in the final analysis, "under a paper-money system, a determined government can always generate higher spending and hence positive inflation," as Ben Bernanke concluded his infamous "Deflation" speech of Nov. 2002.

Destroying money by printing it to excess is easy. The truly superhuman task will be killing inflation after it's really shown up.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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Catching a Falling Financial Knife