Central banks' claims are nothing less than humbug

G20 Finance Ministers and central bank governors are spouting weasel words. At the Group of Twenty meeting in Moscow at the weekend, they once again pledged monetary stability and growth. They insisted that they were not in a currency war and had no intention of devaluing their currencies to boost exports.

At the same time, they promised to cooperate and support “easy monetary policy in the US, Japan and Europe”. An economic recovery in these nations “was vital for global growth”. And, most interestingly, there was a pledge not to “target our exchange rates for competitive purposes”. International Monetary Fund managing director Christine Lagarde even joined in the chorus: “Talk of currency wars is overblown,” she said.

And the statement went on: “To address the weakness of the global economy, ambitious reforms and coordinated policies are key to achieving strong, sustainable and balanced growth and restoring confidence. We will continue to implement our previous commitments, including on the financial reform agenda to build a more resilient financial system and on ambitious structural reforms to lift growth. We are committed to ensuring sustainable public finances.” And on and on it goes.

G20 Pledge contradiction

The G20 pledge, a repetition of numerous previous promises in different words, is a contradiction in terms. The application of quantitative easing (QE), notably central bank purchases of US Treasury and other government bonds, boosts money balances of commercial and investment banks. These banks have the opportunity to either lend the cash to businesses and individuals, hold it and receive interest at the central bank or invest it in a variety of markets and asset classes.

Since economies are slack, what in fact happens is that the money sloshes around, shifting into government and corporate bonds, equities other currencies, gold and other commodities. The inevitable result has been follow-the-leader action by fund managers and individual investors, leading to a surge in corporate bond and equity prices, a recovery in residential and commercial property values and volatility in global foreign exchange markets.

Bank of England and some other central banks bankers follow “Helicopter Ben”

Since the end of 2008, when “Helicopter” Ben Bernanke, US Federal Reserve Board chairman went on a treasury bill and bond buying spree that raised reserves at the Fed by several trillion, the US dollar, has in the main devalued against the Japanese yen, Singapore, Australian and Canadian dollars and other Asian currencies. In recent weeks the greenback has rallied against the yen and Singapore dollar, for example, but it is still 25 per cent lower than its 2007 peak.

Even the euro has rallied in the past few weeks, but with eurozone economies in recession and exports down, the currency is expected to follow the sliding British pound and tumble again.

Concerned emerging nations build up gold reserves

Illustrating the lack of faith in central bank pledges, emerging nations are building up their monetary gold reserves. According to the World Gold Council, central bank purchases last year rose by 17 per cent to 534.6 tonnes, the highest level since 1964.

Indeed there has been net purchases in eight consecutive quarters and in the fourth quarter last year central banks bought 145 tonnes. Russia and China, by far, are leading the way in an effort to hedge reserves against the growing risk of fiat money. In the past dozen years, Russia’s gold reserves have soared from 343 tonnes in 2000 to 1,054 tonnes currently; China from 395 tonnes to 1,054 tonnes; India 358 to 558 tonnes; Turkey from 116 to 360 tonnes; Saudi Arabia from 143 to 323 tonnes; Korea from 14 to 84 tonnes and Thailand 73 to 152 tonnes.

Moreover, Germany, which has gold reserves of 3,391 tonnes, has stated that it wishes to transfer its gold from vaults in New York and Paris to its headquarters in Frankfurt. Half of the gold reserves will be in Germany “to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centres abroad within a short space of time”.

So far QE has failed to ignite real economy

Only the very brave will assume that all that gold buying says nothing about the real state of the global economy.

Central bank policies, combined with poor government fiscal measures (ie. high taxes, limited infrastructure spending, but considerable government waste) have failed to reignite the real economy. The misery of stagflation, high and rising unemployment as well as inflation, is now in evidence in many developed economies. Asset prices are inflating similarly to the period 2002 to early 2008 and “mal investment”, notably the mis-allocation of capital, is increasing.

The Fed and central banks such as the Bank of Japan, and Bank of England believe that a little dose of inflation will raise growth and reduce unemployment. Once the inflation tiger is out of the cage, however, it will be difficult for them to reverse course. A lurch in bond yields and other interest rates could bring in their wake another equity tumble, recession and another spurt in unemployment.

Will they ever learn?

Other pieces on central banks’ inadequate policies and previous failures see:-

The curse of the Fed on the globe and Robin Pringle’s Money Trap