Hey, central banker: got a match?
What tangled webs we weave when first we practice to manipulate free markets.
Hey Janet, got a match?
Like acrobats with balls in the air and plates spinning on sticks, the central bankers are attempting to understand why the theories aren’t working, and the cover is coming off the ball. So many moving parts to control and so many unforeseen events.
Oil prices unravel, and the talking heads promote the benefits to the consumer. They forget the impact on the international banking community. Countries reliant on oil revenue to service their debt are in deep trouble. Companies that rely on oil revenues to service their loans from banks are in the same situation. Thus, banks are exposed. Your money market might own some of the paper in question.
Professor Krugman advises Japan on how this Keynesian thing works as their economy slips off the playing table. With Japan having implemented the ZIRP (zero interest rate policy) about 7 years before the United States, are we witnessing the fruits of this central planning scheme? Are we far behind?
Professor and Fed chairwoman Janet Yellen begins to understand that she “can’t” raise rates, ever, without harming the economic recovery, or forcing a federal government budget crisis. Like the “free beer tomorrow” sign at the local watering hole, Janet continues to speak of coming off the ZIRP with a rate increase.
Then she realizes that she really can’t raise rates. The cost to the federal government of servicing all that new debt – $10 trillion in 7 years, even with just a small bump in rates – is prohibitive.
As we have seen with oil, currencies are now caught in a riptide of unforeseen forces. The euro is down to monthly lows, as Greece seems a short-timer for the EU. All those interventions to adjust the euro to the academically perceived value, now futile. Now, where do the academics decide the new value to be set? And what of the currency losses for all those interventions gone bad?
The schemes of central planners spin like plates on lofted sticks, but now they begin to wobble. Some of the balls once in the air are hitting ground. But rest assured, the academics that have interjected themselves into the free markets are confident that all will end well. Their theories are sound. The entire faculty agrees. Ask Professor Paul Krugman or Professor Yellen.
We have before us a stark reality of the consequences of holding things artificially too long at improperly arrived-at prices. The longer fake price levels are defended, the more violent the price correction when market forces finally come to play. To wit, the world crude oil price and now the euro.
And when the central bankers can no longer hold the EU together, peg the euro to arbitrary relationships, and press interest rates to zero, the reaction may be just as violent for those areas as the crude oil unraveling (nearly 50% in two months). For a cartel, like OPEC, is nothing more than a central planner, and the central banks are nothing more than a cartel. Both are interested in forcing prices, against free-market forces, to levels that suit them.
Friedrich Hayek would agree. The free market knows all things at all times. But the central planners seem to know only that they are smarter than the market, and they assure themselves of that each day at their mutual admiration society get-togethers. Is there a moment coming, an Alec Guiness Bridge on the River Kwai “What have I done?” moment, when these central planners realize they have been mischaracterizing and interfering with the most ingenious mechanism ever devised – the free market? Will their hubris allow such a consideration?
More likely will be a manufactured litany of excuses to be laid amongst the broken theories and once spun plates, books written, and speeches delivered (for a six-figure fee).