September 19, 2007
Many years ago Hans Sennholz said one of the main problems with central banking is eventually the statist manipulators will miscalculate. When an entrepreneur errs the loss is sustained by him, but when a monetary monopoly miscalculates the loss is sustained by all money holders.
Today's interest rate manipulation is another reminder that the financial markets haven't a clue what the problem is nor the source of its cause.
Sadly, within Wall Street's financial world, there is a far greater confidence in the power of the state than in the power of the market. Can there be any doubt that the conflict between market forces and statist intentions can only worsen in the days ahead?
Did you note that there was virtually no mention of the impact on the future exchange value of the dollar which will result from today's action by the FRB? The commentary was a financial euphoria over "saving" leveraged borrowers and equity markets from higher interest rates, as though the effect (the interest rate) is the cause of today's financial market problems! I'm reminded of Mises' observation about breaking the thermometer rather than lowering the thermostat in an overheated room. Only what happened today was far worse,...they raised the thermostat in a futile effort to lower the heat!
The last time I saw such central bank madness was in the fall of 1971 after Nixon imposed price controls on August 15. The FRB reversed itself during the fall and began monetizing debt in their open market operations. The subsequent price inflation and double digit interest rates of the late 1970's were virtually assured by their actions.
The FRB today attacking the effects of a problem which their policies had created earlier is absurd enough, but what's so pathetic is the overwhelming majority of financial markets participants are convinced the FRB is now saving them from the evil consequences of a flawed market process. What's been missed today is the signal sent by the FRB to the world's holders of dollar instuments, and it could not be clearer: The FRB intends to cheapen the future exchange value of the dollar by further monetization of debt and more artificial lowering of the interest rate to save their fellow bankers. So, what else is new, and who's listening? Maybe the Chinese or anyone else interested in losing real wealth?
Actions have consequences, and what is yet to be learned is how the markets reacted today and how they will response later have no causal connection. Clearly, inflation and stagnation lie ahead. The FRB's "miscalculation" today only assures it will be uglier!
© 2022 GaryNorth.com, Inc., 2005-2021 All Rights Reserved. Reproduction without permission prohibited.