Central Banks Versus the People

Published on Macro Business.com.au, by Delusional Economics in Economics, September 18, 2012. (See also G. Edward Griffin’s videos on HBB’s Blog, and 10 Shocking Quotes About What QE3 Is Going To Do To America).

As you are surely aware by now, the US Federal Reserve has announced a new round of quantitative easing which like the ECB’s outright monetary transactions (OMT) is a new program of large scale asset purchases by a central bank. I thought I’d spend a bit of time today talking about these programs because once again I have noticed some large misconceptions in the media about what these operations are, and more importantly, what the likely outcome of them is. 

As I have stated before, one of the major issues I have with the reporting of these types of programs is that they are referred to as “money printing” which, although at some level is technically correct, provides a fairly deceptive view of what is actually happening and in many cases simply adds to the confusion as to what is actually going on.

The reason these operations are referred to as money printing is because when a central bank makes purchases of financial assets it does so by adding amounts to the reserve accounts of banks that either 1) own the asset or 2 ) are the registered bank of the holder of that asset.  In the case of 2 ) the bank will also create a deposit for the account holder. The difference here is quite important so I’ll come back to this point later … //

… The inability and/or lack of desire for new credit is by the private sector is the tell-tale signs of a balance sheet recession which has the following attributes

  • A balance sheet recession emerges after the bursting of a nationwide asset price bubble that leaves a large number of private-sector balance sheets with more liabilities than assets.
  • In order to repair their balance sheets, private sector moves away from profit maximization to debt minimization.
  • With the private sector de-leveraging, even at zero interest rates, newly generated savings and debt repayments enter the banking system but cannot leave the system due to the lack of borrowers.
  • The sum of savings and debt repayments end up becoming the leakage to the income stream.
  • The deflationary gap created by the above leakage will continue to push the economy toward a contractionary equilibrium until the private sector is too impoverished to save any money.
  • In this type of recession, the economy will not enter self-sustaining growth until private sector balance sheets are repaired.
  • So QE and OMT are monetary programs that, in part, aim at increasing the leverage of the private sector, but they have only attempted to address the supply side of the equation. Fiscal policy in the EZ is continuing to lower the private sector wealth and by doing so is reducing the demand for credit which in turn is further weakening the economy. This dynamic appears to be more that offsetting the expansionary monetary program which is why you have seen the ECB’s response continue to become larger and larger over time. The Eurozone is therefore likely to continue to see poor economic outcomes even under the open-ended OMT because the insistence on the fiscal compact as a pre-cursor to renewed intervention is likely to be completely counter-productive.

I think the jury is still out on whether the US is seeing expansion in the real economic activity, but there is no doubt it is performing better than the Eurozone. Whether that continues has a lot to do with what happens in regard to the “fiscal cliff”, which is their own version of the fiscal compact.

(full text).

Links:

Macro 101 – Reserves and interest rates, on Macro Business, by Delusional Economics in Economics, August 15, 2011;

Non au Traité d’austérité, dans Attac international;

1% hide $21 trillion – US big banks hide $10 trillion – ending world poverty: $3 trillion, on Washington’s Blog,  by Carl Herman, July 24, 2012;

Wikileaks and the Worldwide Information War: Power, Propaganda, and the Global Political Awakening, on Global Research.ca, by Andrew Gavin Marshall, December 6, 2010;
Wikileaks et la Guerre Mondiale de l’Information: Pouvoirs, Propagandes et Prise de conscience politique globale, dans Le Grand Soir, par Andrew Gavin Marshall, le 15 janvier 2011;

Video: After 9/11 – A Decade of War, 9.19 min.

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