Saturday, April 25, 2015

Monetary Stimulus A Political Tool? : What Happened to Market Forces?

Who knew? The central bank deciding monetary policy is not good especially when it appears to be motived by politics.

Instead of letting the economy finding it's own levels through competitive market forces, the Federal Reserve take the reigns to manipulate the outcome by falsely holding back real market forces that could show real growth in the economy instead of the stagnate economy that we have now, where some are getting rich while others are struggling to make ends meet.

One has to wonder if this same situation, free money to stimulate the economy, would exist if a Republican was president? I wonder to what will happen on the day after a Republican president is elected in 2016? Will the federal reserve raise interest rates immediately? I think we all know the answer to that.

Monetary Stimulus Does Not Compensate for Real Wealth Creation
Source: James Dorn, "Monetary Stimulus Creates Only Pseudo Wealth," Investors.com, April 20, 2015.

April 23, 2015

The European Central Bank's (ECB) decision to follow the Federal Reserve's footsteps and embark on a massive program of quantitative easing to lower interest rates, encourage risk and inflate asset prices seems to be working for the moment.

New wealth appears to be created even though simple economic logic tells us that monetary stimulus cannot permanently increase a nation's productive capacity or real income. Central bankers are engaged in pseudo, not true, wealth creation.

The wealth effect of central bank "stimulus" will be short-lived. When rates return to normal, as they must, asset bubbles will burst, major losses will be incurred and the distortions in capital markets will become evident.The Eurozone's negative real interest rates are not natural; they are the result of government policy — in particular, the ECB's unconventional monetary policy.

In a normally functioning market economy, with monetary equilibrium, nominal interest rates will be close to natural rates. However, when central banks cause an excess supply of money or an excess demand, monetary disequilibrium leads to a divergence between nominal and natural rates.
The main factor today resulting in negative real rates (i.e., financial repression) is the failure of central banks to adhere to a monetary rule. We live in a world of pure discretionary government fiat monies, and a political environment in which the focus is short-term palliatives rather than long-run solutions.

Economic freedom, not central bank intervention, is the driving force of wealth creation and widespread prosperity. Waiting a little longer with a hope that central banks know how to create wealth is a dangerous gambit.
 

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