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Fed Will Blink

by Bill Bonner, International Man:

There was a time when central banking was an honest profession.

Central bankers provided financing for the government. They backed the banking system, too, by holding savings as reserves, which they lent to solvent member banks in emergencies.

They were tight-lipped, tight-laced, and tightwads. Their role was to say “no” more often than “yes.”

When the king wanted money to fight in a war… or build a bridge… the banker would give the terse reply: “Sire, we don’t have any.”

Real money was backed by gold. And credit had to be backed by real money, which meant it had to be saved. Savings were limited, as was money.

Savings backed 100% of U.S. credit needs until about 1973… two years after President Nixon first announced that the dollar would no longer be backed by gold.

Then, almost unnoticed, a new financial system took over… with new central bankers in control of it.

Forty-five years later, America saves scarcely 20% as much as it issues in new credit.

The other 80% is “funny money” – credit created out of nowhere by the Fed, by banks, and by foreign central banks (mostly recycling trade surpluses).

Doomsday Bug
Haruhiko Kuroda, governor of the Bank of Japan, says he’s going to put out a lot more of this funny money. Bloomberg:

The Bank of Japan will continue with very accommodative monetary policy and maintain the current pace of asset purchases for some time, Governor Haruhiko Kuroda said in an interview.

While Japan’s economy is doing better than thought a few months ago, the inflation rate is still quite sluggish, Kuroda said in New York on Thursday.

“The target is 2%,” said Kuroda of the rate at which the BOJ hopes to destroy its own currency. “We’re still around 0%. So it’s a long way to go,” he said.

The Bank of Japan already owns 40% of outstanding Japanese government debt. It apparently sees no barrier to buying all of it ­– financing Japan’s deficits with make-believe money.

This is not going to happen. Readers will be quick to remember why. Our little secret: Unlike the real-money system that prevailed until 1971, this system – with its heavy reliance on credit – is, surprise, surprise, extremely vulnerable to the credit cycle.

This is the “doomsday bug” buried in the world’s money system.

When the credit cycle turns – when people begin to notice that the whole system is FUBAR and become reluctant to lend – the world’s money disappears…

…and the whole thing blows to smithereens.

Cockamamie Project
But back to honest central bankers…

Another key responsibility of the pre-1971 central banker was to protect the national currency.

Money was limited. Everyone knew it. You couldn’t afford to waste it. Or lose it. Or depreciate it.

And if a banker failed, he was disgraced, fired… and ruined. In ancient England, a banker who lost the kingdom’s money was castrated.

Times have changed, as they say. Now, central bankers are more secure in their private parts and public illusions. They are no longer expected to act within an economy, but upon it.

They are no longer expected to be the lender of last resort, but the lender of first, second, and every other resort.

Nor are they expected to confine their credit – the precious savings of the realm – to solvent institutions that will pay it back.

Instead, they are encouraged to spread their fake money far and wide, scattering it like manna upon every half-wit and spendthrift in the empire.

Do the feds have some cockamamie spending project? Does a corporation want to borrow to buy back its shares? Do the baby boomers want more medical benefits?

Hey, no problem… says the Fed. There is plenty of this fake money for everyone.

No need to dip into the nation’s savings to fund the fool projects. Now the central bank can conjure up credit money – out of nowhere!

Read More @ InternationalMan.com

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