Central Banks – Damaging The World Economy?

Central Banks – Damaging The World Economy?

Central Banks – Damaging The World Economy?

Few economic issues receive as much public attention and cause as much anxiety as our Federal Reserve’s periodic raising or lowering of interest rates. Their choice to hold interest rates close to zero year after year has made saving money or investing in interest-bearing assets futile.  For retirees and soon-to-retirees who are now forced into risky stock investments just to generate needed income, the Fed policy has become a Sword of Damocles hanging dangerously over their heads.

The Federal Reserve is the gatekeeper of the largest economy on the planet, and as such is one of the world’s most powerful institutions.  The power of central banks has only expanded since the 2008 financial crisis, though they’ve consistently used what some call irregular techniques (and others call bad policy) to stimulate their respective economies with less and less success.  This has included repeated rounds of quantitative easing that dilute the value of currency; and ultra-low and even negative interest rates that punish savers and cause havoc in bond markets.

Seth Klarman’s 2021 Letter: Baupost’s “Never-Ending” Hunt For Information

Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More

. One could even argue that U.S. Fed Chair Janet Yellen, and European Central Bank President Mario Draghi wield more influence than the U.S. President or any European political leader.

In the journal Ethics & International Affairs political analyst Jacqueline Best observes central banks’ power is not only pervasive, but also enables them to create economic “winners and losers.”

“Consider, for instance, the disparate reactions of a prospective first-time home buyer and a retired couple living on their savings to the prospect of yet another drop (or increase) in the interest rate.”

Best’s criticism echoes the rising concerns of many economists and analysts surrounding the lack of accountability for those who determine our global monetary policy. At least here in the U.S. we don’t vote central bankers into power, and we can’t fire them if they’re doing a bad job.  The Fed Chair’s decisions don’t have to be approved by Congress, the president or any other government official. Once appointed by the president, he or she simply presides at the pleasure of nobody in particular.  Congress can’t fire the Fed Chair; neither can the president.

Currently, the Fed justifies its decisions by publishing at least some of the data they use in their decision-making process. Best would improve this by encouraging inclusion of more robust public argument and challenges.  In the late 1980s, then-Fed Chair Alan Greenspan in particular came to be regarded as a prophet, or even the “rock star” of central bankers, and his pronouncements largely went unchallenged. But years later many have come to see his easy-money policies as sowing the seeds of the subprime mortgage crisis. Nevertheless, the post-Fed Greenspan blithely went on his merry way, and an ill-informed public was forced to reap the whirlwind in 2008.

Given central bankers’ powers over our personal portfolios, and the economy at large, it may be time to reassess how much of our savings we want exposed to what may end up being equally disastrous decisions.

Gold has consistently revealed its strength when central bankers have proven themselves unable to mobilize the economy. By protecting your savings, and especially your retirement, you’ll sleep better at night realizing you hold an asset negatively correlated to just about everything central bankers have their hands in.

Updated on

No posts to display