Central Bankers Losing Control

The Daily Bell, July 09, 2010 – by Staff Report

D. Strauss-Kahn

IMF tells Europe to inject more stimulus ... The International Monetary Fund has called on the European Central Bank to prepare fresh emergency action to stabilise debt markets, throwing its weight behind calls for renewed monetary stimulus to offset budget cuts. "Markets are not yet convinced of the central bank's commitment to scaling up purchases if necessary to prevent a further deterioration in market functioning," said the IMF's Global Financial Stability Report. The IMF called on Europe's authorities to make their €500bn (£420bn) rescue fund is "fully operational" and to explain how they intend to shore up banks that fail stress tests. "Test results will need to be complemented by a plan that specifies how capital-deficient institutions would be handled. Bank reporting and disclosure standards, in general, need to be improved," it said. – UK Telegraph

Dominant Social Theme: The wise men must step forth and salvage the markets.

Free-Market Analysis: Obviously the austerity meme has served its purpose. The world's central banking wise men seem far more worried now that, left unattended, the West will continue to struggle with deleveraging and price deflation. We have predicted this all along, running a series of articles discussing inflation and deflation and suggesting the likely outcome is an inflationary problem rather than a deflationary one. Here's some more from the article:

The IMF called on Europe's authorities to make their €500bn (£420bn) rescue fund "fully operational" and to explain how they intend to shore up banks that fail stress tests. "Test results will need to be complemented by a plan that specifies how capital-deficient institutions would be handled. Bank reporting and disclosure standards, in general, need to be improved," it said. ...

While the IMF stopped short of calling for the ECB to launch full quantitative easing (QE), it is clearly worried that the bank's passive policies have allowed credit to wilt and led to fresh strains in interbank lending markets and sovereign debt. "Downside risks to the recovery have risen sharply. Bank funding pressures may accelerate the ongoing deleveraging process. It is too early to tell if actual bank lending growth will worsen in the euro area, after recently stabilising at barely positive year-on-year rates," it said.

This is what central banks do, of course. They inflate. In good times, central banks print too much money and in bad times they print as much or more. What central bankers and the power elite that stands behind do not want – and cannot tolerate in our view – is a great deal of social unrest as the result of what could turn into a deflationary depression if fresh supplies of money are not delivered daily. Of course in the long-term it is still unclear as to how much price deflation is to be delivered by the powers-that-be, but they are clearly worried.

We mentioned the other day that the unrest in Europe is being underreported. There are continued massive strikes in both Greece and Portugal, and Spain is not having an easy time of it either. It is likely most important from the standpoint of the elite and the larger socioeconomic structure as well that the unrest be tamed and the system itself reignited. Inflation, in this regard, may be preferable to deflation, at least for the moment. And this is not only a concern in Europe but in America as well.

The same problems that are afflicting Europe have come home to roost in the United States. There is in fact a sovereign wealth crisis that has affected most of America's states and has of course helped destabilize the dollar. The IMF in fact has now urged the US Federal government to work on closing the country's tremendous, ever-increasing debt, and the Washington Post just recently commented on the matter using a vocabulary similar to that of the IMF's:

Federal Reserve weighs steps to offset slowdown in economic recovery ... Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth ... With Congress tied in political knots over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns -- massive infusions of cash, such as those undertaken during the depths of the financial crisis -- but would reconsider if conditions worsen.

Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent. But weak economic reports, the debt crisis in Europe and faltering financial markets have led them to conclude that the risks of the recovery losing steam have increased. After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth. (- Washington Post)

We can see a sub-dominant social theme at work here. The larger theme of course is the wisdom of central banks generally. But the lack of liquidity affecting markets and "sovereign" economies today has its roots in a fairly low velocity of money. And this is obviously just as worrisome in America as it is in Europe. A fiat system, in fact, is only as good as the confidence that people have about it. A fiat system, therefore, is nothing like an asset-based system, presumably one supported by both gold and silver.

Instead, the West struggles a string and makes endless attempts to push it. The situation is bound to be worrisome now only to the powers-that-be that have designed the system and are struggling to hold it together but to investors as well. The struggles of the elite, and their success or failure, will have an impact on every aspect of the West's financial structure.

In fact, there is a whole range of possibilities now that include not only inflation or deflation but the possibility of an economic rebound as well. Central banks can re-inflate in Europe and America but this does not mean that the economies themselves will pick up. There was "stagflation" in the 1970s and if there is additional inflation in the West, stagflation is the most likely outcome once again. If Western economies do pick up a bit, eventually, there is also the possibility of some sort of hyperinflation. It almost happened late in the 1970s, and those were conditions in our view that were actually BETTER than today's.

In such times of crisis, central bankers, having developed the problems to begin with, want to be perceived as having the answers. The answer is always the same of course – and has to do with printing boatloads of money. The investor is left contemplating a range of options having to do with the underperformance or over-performance of a variety of assets depending on the moves made by monetary authorities. Bonds, stocks, gold and silver, commodities in general are all going to be influenced by these decisions.

Politics comes into play as well, given that China, Russia and other countries are increasingly uncomfortable with the dollar. The IMF (controlled in fact by the Anglo-American elite) is offering another, more globalized solution (SDRs) to take the dollar's place. But such a solution has manifold challenges in front of it, including a lack of credibility.

Conclusion: The effect that the Internet has had on people's belief in the system must be factored in, and a general rising tide of disbelief and frustration. The business cycle has not yet played itself out, either. Any moves that central bankers make in either Europe or the US must be seen in the context of an additional 5-10 years of economic restructuring before this current money-metals bull market likely winds to a close. The powers-that-be won't mention it of course, but they've lost control and it is not easy to see how they can regain it in the near future, anyway. They will continue to sound confident; they are not.