QUESTION:
Hi Martin,
How long has the central banking era been going and will it come to an end? How many central banks create liquidity for governments by buying their bonds?
Cheers
SL
ANSWER: I understand that central banks have been demonized and the great conspiracy centers around their ability to create money. Creating money is not really the issue for the amount they have created is peanuts compared to the continued debt created by politicians. Congress just created $1 trillion-plus in December 2015 and nobody noticed.
We need central banks as a clearing mechanism and to maintain reserves of member banks. The problem is that central banks are not all created the same. Jackson destroyed the Bank of the United States, which did not engage in quantitative easing and had no such power to create elastic money. They simply lent money to Jackson’s opponents. The destruction of the central bank resulted in the Panic of 1837 and the sovereign defaults of the states during the 1840s that occurred after the states had issued debt in an attempt to bailout state banks that went nuts without a central bank to control anything.
This constant attack on central banks is really hiding what the problem truly is — government. When the Fed was created, it “stimulated” the economy by purchasing corporate paper. The Fed was NEVER intended to buy government bonds. The politicians did that for World War I and never returned it to its purpose. Then FDR grabbed it and ordered the Fed to buy government bonds at PAR, which was not removed until 1951.
The problem is always politicians. We need to ELIMINATE public debt and outlaw the federal government from borrowing since it never pays anything back. The Fed’s ability to create money to help the economy in a crisis was limited by its design to buy short-term corporate paper. The private sector has to pay its debts. So the right to “create” temporary money made sense for it was eliminated when the corporate paper was redeemed. This was short-term paper.
Even today, the Fed has all this government debt it bought under quantitative easing. It too will be reversed, but they bought long-term debt. That increase in the money supply will contract upon expiration of the debt. Technically, debt is repaid once it expires, and the money created by the Fed vanishes. That is still elastic money.
Eliminating the central banks will not save our future. That would push us over the edge as Jackson did. We need to eliminate government debt and return the Fed to its original design and knock off this manipulation of the Fed for political gain.
Make no mistake about it: the Fed stating interest rates MUST be normalized is not going to help fiscal policy. This is now a war over integrity and we should stop bashing the Fed and start yelling at the real culprits.
As far as when the central banks will come to an end from a clearing perspective — hopefully never. As a government tool to manipulate society, their days are numbered and 2020 looks like a good place to start. If the debt collapses, then the central banks can return to their original function. Those who want to shut down the Federal Reserve would only destroy the economy exactly as Andrew Jackson did.
