The Futility of Central Bank Policy

The comments below are an edited and abridged synopsis of an article by Alasdair Macleod

It is becoming clear to the investing public that the purchasing power of their currencies is declining at an accelerating rate. There is no doubt that the recent announcement that US CPI rose by 6.2%, compared with the longstanding 2% target, came as a wake-up call to the markets.

The Futility of Central Bank Policy - bullionBuzz - Nick's Top Six
London, England, data over Bank of England and Lloyds of London, office buildings & executives.

Along with the other major central banks, the Fed’s reaction will likely be to double down on interest rate suppression to keep bond yields low and stock valuations intact. The alternative will lead to a major financial, economic and currency shock sooner rather than later.

This article introduces the reader to some of the basic fallacies behind state currencies. It explains the misconceptions policy planners have over interest rates, and how central banks have become contracyclical lenders, replacing commercial banking’s credit creation for non-financial activities.

In effect, narrow money is being used by the major central banks in a vain attempt to shore up government finances and economic activity. The consequences for currency debasement are likely to be more immediate and profound than cyclical bank credit expansion.

Up for discussion: Introduction; central bank interest rate errors; monetary policy objectives; and the economic outlook will rapidly deteriorate.

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