The World Financial Crisis of 2008 now seems a long time ago and not worthy of discussion, except at the academic level where professors can point to the power of central banking. After all, didn’t the Fed solve the crisis by buying assets, many of which that were worthless on the free markets, with freshly created dollars from troubled banks and other financial institutions?
So far, it can be said that the Fed’s actions were without negative consequences: no price inflation and no taxes levied on the people. Like manna from Heaven, the money came at no cost.
But the real danger of the Fed’s action lies in general acceptance that central banks can solve any and all financial problems simply by money creation.
For the world’s third largest economy, “Abenomics” now describes the policies of Japan’s Prime Minister Shinzo Abe, which are nothing more than money creation and massive deficit spending with the stated goal of seeking two percent price inflation. The theory is that when savers see prices rising they will not delay purchases because waiting will result in higher prices. Seems like sound reasoning, but is it?
Overlooked is that Japan has an ageing population and that older people tend to be much more conservative with their money. Savings permit seniors to be self reliant. But, the Keynesian solution to Japan’s stagnant economy is for the older people to spend their savings now, not in the future when they may need it. Abenomics is central planning at its worst.
In China, the world’s second largest economy, a credit crunch recently developed, and the Bank of China did what any good central bank would do, it printed money and the markets calmed. Debt in China is now 200 percent of GDP, up from 130 percent five years ago, with local government debt at almost $3 trillion. With China’s economic growth slowing, fears abound that this huge debt overhang may result in a financial crisis. But, will it?
After all did not the Fed avert a meltdown by injecting a few trillion dollars into the US (and the world’s) financial system at virtually no cost? Therein lies the real danger: the general acceptance that central banks can solve any and all financial problems simply by creating more money.
In this financial climate, investors need to hedge against still more money creation. It will come at times slowly and then quickly, as in 2008, and maybe in 2014 as China turns to the central bank solution for its financial crisis: more money creation. It is absolutely a given that inflation lies in our future.