It is not hyperbolic to say that last week the world’s central banks averted a worldwide financial meltdown. And, it is not an exaggeration to say that the public’s response was a yawn.
The central banks prevented the meltdown by “injecting” massive quantities of freshly-created monies into the markets. No new wealth was created, but billions of intrinsically-worthless fiat currencies were brought into existence to handle the financial contagion that was brought on by the subprime mortgage mess. Jochen Sanio, Germany’s Financial Regulator, called it “the worst banking crisis in Germany since 1931.”
The mortgage industry created the mess by lending money to people who were not capable of repaying it. (Remember the ads: If you can afford to rent, you can afford to own?) To get rid of this low quality paper, which has been dubbed “toxic waste” in financial circles, the industry, with its cohorts on Wall Street, rolled the paper into CDOs (collateralized debt obligations) and sold them to banks worldwide.
When it became evident that the subprime CDOs were not worth their face value, the overnight lending rates between banks spiked as banks became nervous about lending to each other. In stepped the central banks, doing only what they are capable of doing in a monetary crisis: print more money.
According to a Reuters report, the Fed “provided” the banking systems with $38 billion on Friday, August 10, the largest single amount of “liquidity” added in the aftermath of September 11, and that was the second day of intervention, with $24 billion having been “infused” Thursday. According to Bloomberg, the ECB loaned 61.05 billion euros ($83.6 billion) after injecting a record 94.8 billion euros of funds the day before.
Worldwide, central banks injected at least $326.3 billion within 48 hours “to prevent markets from spinning into a global liquidity squeeze.” Inflating with the Fed and the ECB were the Bank of Japan, the Reserve Bank of Australia, and the central banks of Norway and Switzerland. Denmark, Indonesia and South Korea said they were ready “to provide cash.”
What we just had was massive inflation of the world’s money supply. But, will the dollar sink because of this specific inflation? Perhaps not immediately because other central banks around the world inflated their currencies right along with Fed. Actually, the ECB inflated the euro in greater quantities than the Fed inflated the dollar.
I suspect the public’s response (non-response?) was because of its lack of understanding of the severity of the crisis. Further, the public seems to accept the notion that central banks are all powerful, capable of handling any monetary crisis. And, why not? Isn’t that the impression conveyed by establishment financial publications, such as The Wall Street Journal, which are staffed by writers supposedly knowledgeable about economics and financial matters? Isn’t Ben Bernanke, the present Fed head, the most brilliant economist alive today?
Besides, didn’t the world’s central banks just avert a crisis? Yes, they did, but not without a price, which will be paid in the future as the massive, newly created intrinsically-worthless fiat currencies circulate through the world’s economies and bid prices higher. Monetary inflation begets price inflation, as surely as night follows day. The greater the money creation, the worse the price inflation. It’s only a matter of time.
Perhaps, what has really come out of the subprime toxic waste mess is that the central bankers have revealed their only solutions to monetary crises: print more money. Jean-Claude Trichet, president of the ECB, said it is “giving the markets the appropriate liquidity.” But, more on target was the assessment by Alice Rivlin, a former Fed vice chairman who’s now at the Brookings Institution in Washington, “The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate.” Perhaps more telling that central banks stand ready to print is the story about how Fed head Ben Bernanke got the moniker of “Helicopter Ben.”
In a 2002 speech before the National Economists Club in Washington, D.C., when Bernanke was a member of the Board of Governors of the Fed, he talked about deflation. Basically, he said that no one should fear deflation because “control of the means of production for money implies that the government can always avoid deflation by simply issuing more money.” Then he alluded to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation.
As the subprime mess was addressed with helicopter flights, so will all other future financial crises. Inflation is the future. As more and more people learn the true nature of today’s monies, it will usher the dollar and the world’s other fiat currencies further down the road to the graveyard that awaits all fiat currencies. Gold bullion and gold bullion coins and silver bullion are appropriate investments for the times.