In the U.S., older voters control both political parties. They control most major corporations. They dominate all major industries. They have their pensions… their health care programs… their stocks… their bonds… their place in the sun.
Naturally, they want the benefits and rewards they believe they have been promised. More than that, they don’t want the sun to move!
This puts central-bank policies in a new light. They are intended not to create an open, entrepreneurial, and growth-oriented economy. Instead, they are meant to protect today’s wealth distribution, including today’s asset values. This can only be done by keeping the credit expansion going; it is the only way to keep the promises alive.
Central bankers are confronted with a dreadful reality. They know that markets don’t fear death. Markets can take their lumps and bounce back. Some people win. Some lose. Businesses are born; businesses die. Markets don’t care. They reward the winners, punish the losers, and move on.
But people care. And they control government. Government controls its central banks (even though they are said to be “independent”). Particular governments have particular supporters and they are almost always people who want to hold on to what they’ve got – retirees, “old and fat” businesses, Wall Street, the rich. Government’s role is to protect today’s claims on capital, even on capital that doesn’t yet exist.
Wall Street and crony businesses – by means of campaign contribution, job offers, speaking fees, and the like – has paid good money for this service. The old have voted for it. The government, and its central bank, will do all they can to provide it. And not merely because their clients want it; politicians and bureaucrats have their own power and wealth to think about, too. Nobody wants to lose what he has… or die.
If it came to a choice – save the free market economy or save the government – central bankers, who are essentially high-level bureaucrats, will choose to save the government.
That was the lesson of Zimbabwe 10 years ago. The government had made promises it couldn’t afford. Things were getting out of whack. Rather than let the economy adapt and adjust, the central bank fed it huge quantities of new money to finance government spending. In the end, the economy fell to pieces; the government of Robert Mugabe survived.
Likewise, developed governments have made huge spending commitments, none more extravagantly – as calculated by the fiscal gap – than the U.S. For the moment, central bankers claim to believe that extraordinarily low interest rates are just the ticket. Somehow (it has never really been explained), low rates are meant to overcome the natural forces of humans, markets, and economies. They will make old people act like young people, make overpriced markets act like cheap ones, and sluggish economies, deeply in debt, act like ones without a care in the world.
You never know, of course. But if this doesn’t work, the feds will continue to act like nurses to an old, deeply indebted society, rather than like midwives to a new one.
When the Crisis Comes
When another crisis comes – it could be as simple as a bear market – the Fed and other central bankers can be expected to act like the Bank of Zimbabwe. That is, they will protect the government at all costs, the economy be damned.
What effect, precisely, this will have on asset prices, I don’t know. Zimbabwe’s stocks were briefly among the world’s top performers – at least in Zimbabwean currency. In the end, though, with the economy in tatters, its companies were worth considerably less than they had been when the economy was still functioning properly.
So investors in U.S. stocks must be counting on central bank management to overcome the tidal forces of demography, debt, and market cycles. They are likely to be disappointed. Nowhere in the history books is there an example of it.
Central banks have not been attempting to manage an economy for very long. But there is no experience we know of that shows us that interest rates set by a group of bank industry insiders are better than those discovered by honest outcry in an open market. All of our theories tell us it is unlikely.
Nor has any central bank ever succeeded in solving the problem of too much debt, except by somehow letting debtors default or inflating away the bad debt. As far as the effect of demography, as far as we know, the authorities can do nothing about it. (Obviously, they can affect populations, but they cannot change the economic or social effects of demography.)
But people come to think what they must think when they must think it. Or as the old-timers on Wall Street put it: Markets make opinions.
A man, thrown suddenly into deep water, believes it is time to learn how to swim. A person appointed to a central bank in the 21st century cannot hold 19th-century views. He is in too deep. Notably, he is the guardian of a world economy with $200 trillion in debt. This is also a world, he believes, that cannot backtrack. New debt must be engaged in order to pay the old debt. A credit contraction may be a normal and natural thing, but not on his watch!
A central banker today has but a single mission – to save the system; that is how he will get his picture on Time magazine. But to save it from what? From old people, and the debts and obligations incurred on their behalf.
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