What’s so great about central banks?

America’s central bankers celebrated the centennial formation of the Federal Reserve System at a beach resort where it was conceived. Given its lousy track record, the only thing to celebrate is their high salaries & increased power over the destiny of the global economy.

For the rest of us, the financial & economy history of the past 100 years suggests that most people have been made worse off!

For example, the US dollar was worth over 22 times more when the Federal Reserve System was created than it is worth today. By contrast, the dollar’s value remained constant due to its link to gold before there was a FED.

Consider that the price of gold under the FED’s watchful eye moved from $35 in 1971 an ounce to $1,400 an ounce, its highest level in real terms since the late 1970s, & silver is flirting with $40 an ounce.

It is clear that investors believe they need to hedge against the risk of higher future price inflation, a vote of no-confidence on the actions of America’s central bankers.

And there is incoherence in the macroeconomic logic behind monetary policy. For example, central bankers believe that buying government bonds to drive down long-term interest rates is a good thing since that will supposedly boost economic growth.

Incongruously, the same logic insists that higher saving rates are bad since consumption will be lower. But, this ignores the fact that increased saving tends to cause interest rates to fall! Then, why ain’t this good for economic growth…?

While the artificial lowering of interest rates subsidizes government borrowing so politicians can spend more and acquire greater powers, it tends to debase the currency. But it also causes distortions in capital flows and fosters asset bubbles.

New York District Bank of Federal Reserve

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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