Central Banks Admit They Know of Only One Solution

James E. Miller

Last week, major central banks, including those in the U.S., Japan, Canada, and Switzerland, announced coordinated action in lowering the cost of dollar borrowing for other foreign central banks.  This policy was directed mainly toward the European Central Bank which has, unlike the Federal Reserve in the U.S., been reluctant to explicitly run its printing press to prop up the Eurozone.  So what exactly does this new "coordinated action" (a favorite phrase among bureaucrats) entail? 

The quick and dirty explanation is that the Fed lowered the interest rate it charges foreign central banks to utilize its dollar swap lines.  Bernanke and the other decision makers at the Fed made it cheaper for the others to borrow dollars.  The original interest rate charged was a measly 1% but has now been lowered to .5%.  Should the need arise, the Fed just made it easier for dollars to flood the world.

While this announcement brought stock market gains; so did the endless "emergency meetings" called by Eurozone leaders that brought press releases penned with soaring rhetoric over a final fix that lacked any actual or workable details.  Normally, the brief shot-in-the-arm market optimism from said meetings slightly pushed down bond yields for a day or two, if that.  This time may be different however as some financial analysts regard anything that makes the stock market move up as a great thing and this new policy doesn't immediately result in an increasing of the Fed's monetary base.  Money printer enthusiast and Keynesian worshipper Paul Krugman was surprisingly indifferent about the announcement.

What isn't mentioned by either is that the Fed's action doesn't create new dollars now.  It depends on the willingness of the European Central Bank and other central banks to borrow dollars in order for new money to be digitized into existence.  But make no mistake, the dollars will start flowing.  As Tony Crescenzi of PIMCO, the world's largest bond investor, notes:

Keep in mind that any use of the Fed's swap facility expands the Fed's monetary base: all dollars, no matter where they are deposited, whether it be Kazakhstan, Japan, or Mexico, wind up back in an American bank. This means that any time a foreign central bank engages in a swap with the Federal Reserve, the Fed will create new money in order to make the swap. Use of the Fed's liquidity swap line in late 2008 was the main cause of a surge in the Fed's monetary base at that time.

Though Europe's economy is heavily burdened with bloated welfare states, the real structural issue facing the continent, along with the rest of the world, is far more significant.  The reason countries like Greece, Portugal, and Italy (along with the U.S.) racked up such large accumulations of public debt is the guarantee that central bankers always fall back on what they know best: money printing.  To paraphrase contrarian investor Marc Faber on the mindset of Keynesian economists, the solution to all dilemmas is to print money.  When that doesn't work, print more money.  Though the Fed's new attempt at coming to Europe's rescue only opens up the door for more dollar creation, the U.S. monetary base has already been expanding rapidly again since July.  Bernanke, along with China who also relaxed banking reserve requirements for the first time in years, is setting the stage for money printing on a globalized scale.  This new announcement of further dollar easing will provide cover for the Eurozone summit on December 9 which will undoubtedly provide a mandate for the ECB to finally begin aggressive euro easing while simultaneously violating the original treaties that created the European Union.

While the Fed's cutting of swap line interest rates had many financial pundits rejoicing over the subsequent stock market rally, stocks almost always react positively to news of government bailouts or central bank intervention.  What investor wouldn't take advantage of a situation where taxpayers are forced to foot the bill for your losses? But money printing begets money printing however as it never solves any problem so far as kicking the can down the road to buy more time.  As economist Ludwig von Mises noted:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

As long as central banks are always willing and able to print on demand, governments will spend like drunken sailors as banks take on greater risk.  Both know full well the backstop of having debt papered over through inflation waits as a landing pad should financial disaster strike.  Meanwhile Joe "Middle Class" Taxpayer watches his personal savings succumb to ever rising prices.

Anyone not willing to watch their retirement gobbled up had better recognize this trend before it's too late.  It will make the difference between spending your golden years actually retired or cashiering at Walmart.

Last week, major central banks, including those in the U.S., Japan, Canada, and Switzerland, announced coordinated action in lowering the cost of dollar borrowing for other foreign central banks.  This policy was directed mainly toward the European Central Bank which has, unlike the Federal Reserve in the U.S., been reluctant to explicitly run its printing press to prop up the Eurozone.  So what exactly does this new "coordinated action" (a favorite phrase among bureaucrats) entail? 

The quick and dirty explanation is that the Fed lowered the interest rate it charges foreign central banks to utilize its dollar swap lines.  Bernanke and the other decision makers at the Fed made it cheaper for the others to borrow dollars.  The original interest rate charged was a measly 1% but has now been lowered to .5%.  Should the need arise, the Fed just made it easier for dollars to flood the world.

While this announcement brought stock market gains; so did the endless "emergency meetings" called by Eurozone leaders that brought press releases penned with soaring rhetoric over a final fix that lacked any actual or workable details.  Normally, the brief shot-in-the-arm market optimism from said meetings slightly pushed down bond yields for a day or two, if that.  This time may be different however as some financial analysts regard anything that makes the stock market move up as a great thing and this new policy doesn't immediately result in an increasing of the Fed's monetary base.  Money printer enthusiast and Keynesian worshipper Paul Krugman was surprisingly indifferent about the announcement.

What isn't mentioned by either is that the Fed's action doesn't create new dollars now.  It depends on the willingness of the European Central Bank and other central banks to borrow dollars in order for new money to be digitized into existence.  But make no mistake, the dollars will start flowing.  As Tony Crescenzi of PIMCO, the world's largest bond investor, notes:

Keep in mind that any use of the Fed's swap facility expands the Fed's monetary base: all dollars, no matter where they are deposited, whether it be Kazakhstan, Japan, or Mexico, wind up back in an American bank. This means that any time a foreign central bank engages in a swap with the Federal Reserve, the Fed will create new money in order to make the swap. Use of the Fed's liquidity swap line in late 2008 was the main cause of a surge in the Fed's monetary base at that time.

Though Europe's economy is heavily burdened with bloated welfare states, the real structural issue facing the continent, along with the rest of the world, is far more significant.  The reason countries like Greece, Portugal, and Italy (along with the U.S.) racked up such large accumulations of public debt is the guarantee that central bankers always fall back on what they know best: money printing.  To paraphrase contrarian investor Marc Faber on the mindset of Keynesian economists, the solution to all dilemmas is to print money.  When that doesn't work, print more money.  Though the Fed's new attempt at coming to Europe's rescue only opens up the door for more dollar creation, the U.S. monetary base has already been expanding rapidly again since July.  Bernanke, along with China who also relaxed banking reserve requirements for the first time in years, is setting the stage for money printing on a globalized scale.  This new announcement of further dollar easing will provide cover for the Eurozone summit on December 9 which will undoubtedly provide a mandate for the ECB to finally begin aggressive euro easing while simultaneously violating the original treaties that created the European Union.

While the Fed's cutting of swap line interest rates had many financial pundits rejoicing over the subsequent stock market rally, stocks almost always react positively to news of government bailouts or central bank intervention.  What investor wouldn't take advantage of a situation where taxpayers are forced to foot the bill for your losses? But money printing begets money printing however as it never solves any problem so far as kicking the can down the road to buy more time.  As economist Ludwig von Mises noted:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

As long as central banks are always willing and able to print on demand, governments will spend like drunken sailors as banks take on greater risk.  Both know full well the backstop of having debt papered over through inflation waits as a landing pad should financial disaster strike.  Meanwhile Joe "Middle Class" Taxpayer watches his personal savings succumb to ever rising prices.

Anyone not willing to watch their retirement gobbled up had better recognize this trend before it's too late.  It will make the difference between spending your golden years actually retired or cashiering at Walmart.