Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Central Banks Have Violated Fundamental Laws of Finance

Interest-Rates / Central Banks Feb 03, 2015 - 10:13 AM GMT

By: EconMatters

Interest-Rates

Is Monetary Policy Too Complicated for Mainstream to Understand?

It is amazing how far Central Banks have been allowed to go with regard to policy tools and influence, and how extreme their policy measures have become since the financial crisis. No other form of governmental authority has been granted these types of unrestrained powers in any branch of government, not Congress, the Supreme Court, the President, or the Military for comparison`s sake in the United States.


These policy measures really are the perfect example of taking maybe what may be an effective policy tool in strategic, but rare instances and adopting it as an everyday, cure all that becomes standard operating procedure for a banking, finance and monetary system.

Healthy Financial Infrastructure

It has been said that a modern civilization needs a banking infrastructure to fully realize its potential, and grow from a business and economic standpoint that represents the modern capitalistic model which has greatly improved human technological, creative and individual prosperities.

Read More: Low Rates and QE are Deflationary at the Zero Bound

Central Banks & “Monetary Extremism”

However, the last seven years of Central Bank actions, and the last 6 months in particular with the ECB`s actions to enact extreme monetary measures, the Federal Reserve making excuse after excuse to defer normalizing monetary policy, the Bank of Japan just experimenting with monetary policy solutions, and the recent cascade effects on other central banks to lower their rates to combat the side effects of the first movers “monetary extremism” it has become abundantly clear to all but the politicians that central banks are no longer the all-knowing saviors of the financial system, but in fact have gone off the deep end, left to their own unregulated devices, and have become a large part of the problems in and of themselves.

Basic Finance Principles the Starting Point for Economic Theory

There is a major distinction between economic theory, and finance theory but let`s get this one thing straight, economic theory starts with finance theory, and not the other way around. There are certain immutable laws of finance that should never be violated under most circumstances, even for a few months; let alone let to stand as permanent fixtures of the monetary system in a capitalistic system.

ZIRP is the main problem with the global economy right now, and all the central banks are doing the exact opposite of what they should be doing, which is normalizing rates, developing a functioning yield curve which every modern lending system since the beginning of a banking infrastructure and finance community has relied upon to fully respect capital, and allocate capital to its most efficient pro-growth projects in society.

Japan ZIRP Model Failed

Just take Japan they have tried this ZIRP model for over 20 years, it is a complete failure, remember when Japan was the rising giant of the East, and now the BOJ has gone completely rogue, well not according to the Krugman’s and the Bernanke`s of the world, which is where this whole modern ZIRP Economic Garbage of a theory went to the dark side in what I label “Modern Monetary Extremism”.

Read More: The Counterfactual Case Against ZIRP 

Monetary Extremism: Like Having a Military Draft in Peace Time

If this happened in any other area of society take it the military, Supreme Court, a religion, a school board it would all have been rejected thoroughly by society, extremism of this magnitude is usually rejected in Democratic societies.

Yes it is extremism Paul Krugman, one doesn`t take emergency measures and then implement these measures for seven straight years, the equivalent of an entire business cycle in some cases, to the point that they become the actual basis for the financial principles that make up the monetary system of banking, lending and commerce.

Negative Real Rates a Big Problem for Central Banks

All one has to do is look at the negative real rates of the bond market to see the improper allocation of capital in the financial monetary system, in short the immutable laws of financial theory have been violated, and this is a problem for a functioning, and healthy capitalistic system. Remember economic theory comes from finance principles not the other way around, the economists of the world have completely ruined the financial system. The damage they have wrought on the financial system is far worse than the original financial crisis they were trying to fix. Gosh we only had a recession which we have had many in the history of the world, but now we are stuck with dysfunctional and socialized financial markets, the most basic strike against everything financial markets and capitalism stands for!

Read More: Federal Reserve Overstepped Bounds with Monetary Policy

Capital Allocation, Productive Growth & Negative Real Rates of Return on Investment

When I look at all the negative real rates around the world, and how much money, trillions and trillions of dollars chasing yield opportunities in electronic markets instead of this capital actually being incentivized by a normal functioning rate structure and curve in the global bond markets where normal finance relationships that have stood since the beginning of modern business transactions it is apparent that central banks need to actually start normalizing rates, and not lowering them because the zero bound is detrimental when utilized past 6 months to a year at the most in extreme emergency situations. ZIRP keeps money from actually getting out into the real world, and ends up incentivizing more capital searching for Yield in highly insulated financial markets, this capital never reaches the ‘real Economy’.

Zero-Bound is Deflationary Monetary Policy

I am not saying the Fed Fund`s Rate should be raised to 10% and higher is better, that is the extreme in the opposite direction. But this ZIRP Love Affair and Obsession got way ahead of its usefulness, and it was bad enough when Japan was the only country in the world going down this path, which should have served as a cautionary tale to the Krugman and Bernanke`s of the economic elite in this country, but the “Japanification” of the entire global monetary system, is the biggest problem the global economy faces right now. It incentives unproductive and highly inefficient uses of capital allocation strategies, and is actually deflationary, which is ironic because this is the very reason used for going down this extreme monetary path in the first place!

A healthy 3% Fed Fund`s Rate Allocates Capital in More Productive Growth Oriented Projects

I know it is counter-intuitive to what these economists believe, but a healthy 3% Fed Funds Rate will go a long way towards restoring basic financial principles and relationships in the broader economic system. It will promote much more productive uses of capital, in a sense respecting capital, and restoring the necessary healthy financial relationships needed for stimulating productive growth in the global economy. Negative Real Rates are a problem for central banks, certain basic fundamental finance principles must be respected at all times, and one of them is that a healthy banking, lending and properly functioning monetary system must always have positive real rates of return on investment. It serves as the basis for any healthy allocation of capital within a given society that promotes long-term growth initiatives. ZIRP in essence is deflationary in nature, it becomes a self-fulfilling, reinforcing slippery slope of “Monetary Extremism” and should be rejected at all costs!

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2014 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

EconMatters Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules