There's no will to fight inflation
Central banks around the world won't stop printing money if it means choking off growth. Don't expect anything different from the U.S. Fed.
The world's central banks are loath to take away the punch bowl. Lest you think otherwise, consider the path forged by the Reserve Bank of Australia.
After recently suggesting it might raise interest rates sometime soon, the bank had a change of heart. I quote from the minutes of its Aug. 4 meeting:
* Bing:What causes inflation?
"A particular source of uncertainty was whether the recent growth in household spending was due mainly to temporary government handouts, in which case it would probably soon fade."
We'll see a variation of the Bloomberg headline for that story -- "Australia's RBA sees danger of raising rates too soon" -- often in the days ahead. That's because all of the central banks will be particularly reluctant to snuff out any "green shoots" in the economy.
And, when you remember that business is booming in Australia versus America (via its strong housing and commodity markets), you can only imagine how slow the U.S. Federal Reserve will be to take away the punch bowl here. This is all the more true given the political heat it will face as the unemployment problem proves to be particularly intractable.
Indeed, until the U.S. reaches full employment (which I don't think will happen for many years), the pressure will be on the Fed to keep printing money.
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Trouble over the pond, too
Of course, the Australian central bank is not alone. Similar cooing sounds were uttered by the Bank of England as it recently upped its quantitative easing. Meanwhile, the Aug. 19 Financial Times carried a story headlined "ECB urges more stimulus measures."
It began: "Emergency growth-stimulating policies are still needed to support continental Europe's fragile economic recovery, even though Germany and France have emerged from recession, a top European Central Bank policymaker has warned. Axel Weber, Germany's Bundesbank president, made clear he would not rush to withdraw the extensive measures taken by governments and the ECB."
Money printing is just too easy (and seemingly painless) for central planners-cum-bankers to resist.
Noxious greenback emissions
That brings me to an Aug. 18 op-ed piece by Warren Buffett in The New York Times. In "The greenback effect," he described why the Fed is doing all of this money printing, though he doesn't explain the root cause of what he thinks "necessitated" it in the first place. Let me do so: The root cause is the Fed, which created the housing bubble, aided by the abdication of responsibility on the part of regulators, which led to the near collapse of the financial system.
Nonetheless, Buffett did point out where we are headed in terms of dealing with the massive deficits that have arisen from the bailouts:
"Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: 'By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. . . . The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.'"
My readers will recognize that process as one I have described for years in shorthand format: In a social democracy with a fiat currency, all roads lead to inflation.
Buffett warns, "Unchecked greenback emissions (his clever synonym for money printing) will certainly cause the purchasing power of currency to melt" -- which I agree with.
And he concludes, "The (U.S.) dollar's destiny lies with Congress." Well, if that's the case, we all know how this movie ends, because U.S. government won't have the foresight or the willpower to address the underlying problems until long after it's possible to have helped ameliorate them.
Besides, while U.S. Congress has done us little good, the real problem is the Fed. But I think that on another point, Buffett and I would certainly agree: If nothing of any consequence is done (which is my expectation), the nascent funding crisis I've written about will become a full-fledged train wreck.
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