Published : March 23rd, 2012
Ben Bernanke’s smiling face on the cover of the April issue of The Atlantic is a testimony to how short America’s collective memory is. While the Fed chief is feted as the savior of the global economy thanks to his monetary policy genius, it’s apparent how quickly many have forgotten how his sluggish response to the brewing credit storm in 2006-2007 brought the U.S. to the edge of the abyss.
A more recent example of a dilatory central bank response to a major economic crisis can be seen in the European Central Bank’s (ECB) eleventh hour decision to roll out a €1 trillion rescue package for the troubled eurozone. Where was the ECB in 2010 and 2011 when such decisive action could have prevented – or at least mitigated – much of the global market volatility and European economic misery?
The problem confronting the global economy has more to do with the hyper-aggressive action of the central banks than it does their unresponsiveness to crises. What are the economic consequences of $600 billion worth of quantitative easing combines with a €1 trillion ECB bailout? In the days before interconnected economies perhaps these sums would have been relegated to the regions in question. But today, rash monetary policy action has global repercussions.
Indeed, we’re already seeing the unintended results of this liquidity explosion. Although so-called “core” inflation remains muted in the U.S. and other developed nations, retail food and fuel prices are rising globally and have led to major social and economic problems in less developed countries in the Middle East. Especially hard hit by this aspect of price inflation are the elderly and the poor.
As the writer of Ecclesiastes tells us, “money answereth all things,” so there is a basis for believing that artificial money creation by central banks can at least temporarily ameliorate debt crises. The problem is that is that money and credit should enter the economy through normal channels without creating imbalances. The only way this can happen is if the money is backed by a nation’s productivity. Production is the ultimate money standard and with insufficient demand for money arising from diminished production, it follows that excess liquidity will flow into less productive channels. Stock and commodity speculation are among the biggest such liquidity traps today and are clearly benefiting from the recent liquidity creation of the central banks.
Thanks to BrotherJohnF