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The Global Problem: Monetary Policy Can't Fix An Economy's Structural Problems

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

When we look back from 2025, it will be painfully obvious that central bank policies exacerbated the systemic crises that brought down the global financialization machine.

What with all the praise being heaped on central banks for "saving" the world from economic doomsday in 2008, it's only natural to ask which structural problems their unprecedented policies solved in the past 6 years. After all, "saving" the world from financial collapse was relatively quick work; so what problems beyond imminent implosion did the central banks policies solve in the past 6 years?
 
Answer: none. zip, zero, nada. The truth is central bank policies of zero-interest rates and free money for financiers have made many structural problems worse.
 
Did central bank policies resolve the structural problem of unfunded pension and retiree healthcare liabilities? No, they made it worse, as zero-interest rates have reduced the yields on pension funds, 401Ks and IRAs to mere pittances. This destruction of safe yields has driven pension funds into risky investments in junk bonds and stocks, leaving them vulnerable to devastating losses when the current credit bubble bursts.
 
Did central bank policies resolve the structural problem of corporate wealth buying political influence? No, they made it worse, by encouraging corporations to borrow vast sums to use on whatever they fancied--for example, lobbying and share buybacks.
 
Did central bank policies resolve the structural problem of rising dependence on credit for weak "growth"? No, they made it worse, as cheap money enabled the re-emergence of subprime loans to marginal borrowers. The deterioration of credit quality guarantees a credit crisis and bubble pop as marginal borrowers default.
 
Did central bank policies resolve the structural problem of low investment in new assets that boost productivity, enabling widespread advances in wealth? No, they made it worse, as near-zero interest rates for financiers and corporations and limitless liquidity have incentivized debt-based speculation and highly leveraged bets on completely unproductive projects such as share buybacks, which boost the value of corporate insiders' stock options while producing no new goods or services.
 
Did central bank policies resolve the structural problem of rising wealth/income inequality? No, they made it worse, by boosting the value of assets owned by the super-wealthy .01% and to a lesser degree, the top 5%.
 
Did central bank policies resolve the structural problem of moral hazard, the separation of financial risk from consequence? No, they made it worse, as monetary policies were designed not to help Main Street but to recapitalize Wall Street banks by diverting tens of billions of dollars that were once paid in interest to depositors straight into the banks' coffers.
 
Nothing has changed: private banks are free to make risky bets, knowing that if the bets go sour the state or central bank will make good their losses.
 
Did central bank policies resolve the structural problem of sovereign debt, i.e. central states overborrowing and saddling future generations with crushing debt loads? No, they made it worse, as zero-interest rate policies have enabled central states to borrow gargantuan sums without the interest due on the debt squeezing out other spending.
 
When credit is nearly free, there's no need to make hard choices or face the costs of systemic corruption, waste, fraud, cronyism and inefficiency; just borrow another trillion dollars, yen, euros or yuan to prop up parasitic elites and vested interests.
 

When we look back from 2025, it will be painfully obvious that central bank policies exacerbated the systemic crises that brought down the global financialization machine. Extend and pretend only increases the power and amplitude of the crises that will eventually burst forth from the monetary dysfunctions and distortions that are currently praised as financial genius.

 

 

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Thu, 03/05/2015 - 12:56 | 5857848 PartysOver
PartysOver's picture

Nope, but it can fix the stock market.

Thu, 03/05/2015 - 12:59 | 5857857 Publicus
Publicus's picture

Sure it can, when you print money to fund jobs. Basic income is the solution.

Thu, 03/05/2015 - 13:07 | 5857872 NoDebt
NoDebt's picture

And when it hits, the Fed will still be at 0% Fed Funds rate.  QE whatever and another tap on the back to kindly ask the taxpayers for another bail-out will be all they have left.  Scratch that.  A club over the savers' head and then just take the wallet out of their back pocket (a trick they can only do once, by the way).

The next significant downturn will be the widowmaker, and they know it.

Thu, 03/05/2015 - 13:20 | 5857932 ILLILLILLI
ILLILLILLI's picture

Everyone who is a homeowner just *knows* that you can fix a collapsing foundation if you put a little more paint on the walls...especially if it's a nice color.

Thu, 03/05/2015 - 13:33 | 5857977 Bemused Observer
Bemused Observer's picture

Right...and you can add value by adding that third floor!

Slap a little mortar on that crack and stop being such a ninny...the foundation is sound.

Thu, 03/05/2015 - 15:14 | 5858396 TeethVillage88s
TeethVillage88s's picture

Maybe a good time to pay off the mortgage, and relook at gold at $1199 and Silver at $16.23.

But I heard some people have had their Mortgage Equity Stolen at the County Level some how. I'm not sure if that is true or a trend or how easy it is to accomplish.

Thu, 03/05/2015 - 12:59 | 5857860 knukles
knukles's picture

We're in a global Liquidity Trap, which is a monetary phenomenon brought upon by non-monetary factors.

Thu, 03/05/2015 - 13:37 | 5857989 KnuckleDragger-X
KnuckleDragger-X's picture

Gee who knew.... Fixing structural problems is the last thing they want to do since there is no upside for them.

Thu, 03/05/2015 - 14:11 | 5858143 stant
stant's picture

Liquidity trap hoarding of cash because of expectations of deflation , lack of demand or war. In this case all three

Thu, 03/05/2015 - 15:19 | 5858415 Gab Timov
Gab Timov's picture

fix as in rig

Thu, 03/05/2015 - 13:00 | 5857859 yogibear
yogibear's picture

The Federal Reserve's only solution is to steal from the 99% and give to the 1%.

Seems like a good way to revolution.

Thu, 03/05/2015 - 13:05 | 5857875 venturen
venturen's picture

It fixed the lack of bonuses on Wall Street....back to a record.

It fixed massive campgain contriutions to enablers from the richest.

It have however broken the trust of whole lot of people and there will be repercussions. During my half century nothing has so appalled me as what has happened during Obama term!

Thu, 03/05/2015 - 13:10 | 5857889 Callz d Ballz
Callz d Ballz's picture

"The Global Problem: Monetary Policy Can't Fix An Economy's Structural Problems"

As Captain Obvious struts by doing the funky chicken.

Thu, 03/05/2015 - 13:38 | 5857993 KnuckleDragger-X
KnuckleDragger-X's picture

Followed by a twerking Yellen.....

Thu, 03/05/2015 - 17:09 | 5858839 Caleb Abell
Caleb Abell's picture

Thank you for that horrifying visual.  My diet will do well today as I have lost my appetite.

Thu, 03/05/2015 - 13:09 | 5857891 phat ho
phat ho's picture

same as it ever was

Thu, 03/05/2015 - 13:09 | 5857892 TNTARG
TNTARG's picture

The man knows his shit:

 

"Lord Jacob Rothschild has warned investors that the world is mired in the most dangerous geopolitical situation since World War II.

The 78-year-old chairman of RIT Capital Partners, a £2.3bn trust, used the organization’s annual report to caution savers that the focus of the firm would be the preservation of shareholders’ capital and not short term gains.

Rothschild said that “a geopolitical situation perhaps as dangerous as any we have faced since World War II” has created a “difficult economic background” of which investors should be wary.

Rothschild, whose business associates include Warren Buffett and Henry Kissinger, blamed the fraught climate on, “chaos and extremism in the Middle East, Russian aggression and expansion, and a weakened Europe threatened by horrendous unemployment, in no small measure caused by a failure to tackle structural reforms in many of the countries which form part of the European Union”.

“RIT is popular among private investors thanks to its excellent track record and its conservative approach to conserving capital,” notes the Telegraph’s Richard Dyson. Rothschild and his daughter Hannah jointly own shares in the trust worth approximately £160m.

Rothschild’s warning follows reports from January’s Davos Economic Forum during which it was revealed that the wealthy are purchasing secret hideaways in remote locations in order to escape social upheaval and possible riots.

Economist Robert Johnson made headlines when he divulged that “hedge fund managers all over the world….are buying airstrips and farms in places like New Zealand because they think they need a getaway.”

Johnson cited income inequality and the potential for civil unrest and riots as the reason for the panic.

“A lot of wealthy and powerful people are quite afraid right now – they see us on an unstable trajectory,” said Johnson. “As the system doesn’t have proper resources, as it doesn’t represent people, things are getting more and more dangerous as say Ferguson, Missouri brings to bear.”

Realtors in New Zealand subsequently confirmed the flight to safety by the elite, noting that “paranoia” and concerns about personal safety and global crises were driving the trend."

Is the people of the World gonna dance it again?

Thu, 03/05/2015 - 13:23 | 5857943 GCT
GCT's picture

Spot on TNTARG  Follow the money and the wealthy are indeed buying property in remote areas.

New Zealand is just one.  Many are gobbling up remote areas in South America and private islands.  Hell last year they were talking about constructiing an island off the Coast of California for the wealthy complete with banks and no taxes just pay to live there.  This was complete with farming and protection provided.  No country would have sovereignty over it. 

I think thy gave that up once they realised they would be one big target in the reset!  

Thu, 03/05/2015 - 13:41 | 5857951 Batman11
Batman11's picture

What was the most popular banner in last year's anti-austerity protests in Spain:

"unconditional bailouts for bankers and austerity for the people"

People have this strange idea that things should be fair .......

When they get pissed off enough they use lamp posts and piano wire to  deal with the offenders.

Run and hide banksters.

 

 

 

 

Thu, 03/05/2015 - 15:10 | 5858375 TeethVillage88s
TeethVillage88s's picture

Seems worth Retweeting. We saw other stories on ZH about Wealthy selling Equities or Bonds to get into Cash, like Warren Buffet, and another story about Wealthy Buying Gold.

Thu, 03/05/2015 - 13:09 | 5857893 Duc888
Duc888's picture

We just need to bring in more illegals, and import more H1B Visa holders, tax the hell out of small businesses and offshore more jobs. That worked out so well since 1980 that we just need to do moar of it.

Thu, 03/05/2015 - 13:11 | 5857901 SmedleyButlersGhost
SmedleyButlersGhost's picture

I'll admit I'm grateful to them  Had it all cratered in 08 - I was totally unprepared.  well prepared now and i'd guess the 08 wake up call was heard by a good  number of others who have used the time wisely.

Thu, 03/05/2015 - 13:13 | 5857911 FreeShitter
FreeShitter's picture

Now is our time to get right with God and prep like no other time.

Thu, 03/05/2015 - 13:17 | 5857927 PartysOver
PartysOver's picture

Yep, play there game to accumulate the fiat.  Spend the fiat to fund the prep.  Wash, rense, repeat.  Been doing it since '09.

Thu, 03/05/2015 - 13:15 | 5857919 Seasmoke
Seasmoke's picture

Correct. Same here. Although I then Wrongly believed it was my job to wake others up. What a Waste of time that turned Out to be.

Thu, 03/05/2015 - 13:49 | 5858039 SmedleyButlersGhost
SmedleyButlersGhost's picture

ha - someone needs to comeup with a decoder ring with 3 settings - alive, may be resusitated and lastly - brain dead so DNR. Would save a ot of time and wasted effort

Thu, 03/05/2015 - 13:38 | 5857992 City_Of_Champyinz
City_Of_Champyinz's picture

I agree 100%...

Now I have almost a one year supply of freeze dried food on hand, several thousand rounds of rifle/pistol ammunition, a couple of assault rifles, and an ever growing pile of silver.

Bring it on rioters...

 

 

Thu, 03/05/2015 - 13:12 | 5857905 Seasmoke
Seasmoke's picture

That's looks like the Pandoras Box has been open. Moral Hazard is a bitch.

Thu, 03/05/2015 - 13:12 | 5857906 Batman11
Batman11's picture

Japan 1989 – Enormous property bubble bursts

Japanese hide bad debts on banks’ balance sheets and use QE and low interest rates to keep things going.

Result – stagnation.

US 2008 – Enormous property bubble bursts

US and Europe hide bad debts on banks’ balance sheets and use QE and low interest rates to keep things going.

Result – stagnation.

Einstein’s definition of madness - “Doing the same thing again and again and expecting to get different results”.

Thu, 03/05/2015 - 15:02 | 5858341 TeethVillage88s
TeethVillage88s's picture

Thanks.

Thu, 03/05/2015 - 13:30 | 5857962 aqualech
aqualech's picture

Who was it said "let no crisis go to waste"?  They haven't.  The cure has immensely increased the holdings of the Central Bank and enriched Wall Street.

Revolution?  At the same time, the percentage of the population clinging to the apron strings of Big Gov (and in their minds, by connection the "Central Bank") has grown immensely.

Thu, 03/05/2015 - 13:43 | 5858019 jmc8888
jmc8888's picture

The fraud that led to 2008 not only was not 'fixed', it was made worse.  2009 thru now has seen a massive increase in the same exact fraudulent practices that led to 2008.

In essence, their response to massive fraud, was massively more fraud.

Glass-Steagall

Thu, 03/05/2015 - 15:00 | 5858281 SMC
SMC's picture

Free money is not the answer. Freedom to open and operate a business without interference is.

An example:  http://www.naturalnews.com/048868_free_market_snow_shoveling_entrepreneu...

Thu, 03/05/2015 - 14:50 | 5858294 VWAndy
VWAndy's picture

Its all fake choas. Everything about economics is a red herring.  All the numbers are cooked. The only thing I am sure of is the truth if it ever came out will be shockingly different from what most expect.

Thu, 03/05/2015 - 14:55 | 5858320 TeethVillage88s
TeethVillage88s's picture

Maybe Developing countries have a similar problem of huge labor force just like in the US & Europe & China to a larger Extent. Huge Labor Force with few jobs and little Investment is status quo.

I made a statement that it was up to US Congress to make the Legislation to fix our problems with a shrinking Middle Class, imprisonment of young males, dumbing down of the population, fraud, corruption, waste in Federal Spending, Off-Shoring, Outsourcing, Decapitalization of US Industries, Use of Slave Labor in our Free Trade Treaties, and lack of large trends to build, research, discover new Industries or Build New Infrastructure, New Technology Trends that supply both Jobs for our Future but also protect our future.

One comment I got back was that BIS was really the force that controls our future.

Maybe I was short sighted. If states and Counties can find the funding or create the funding within their state or region without VICHY DC, The FED, or VICHY Wall Street... the power can shift.

Background:

There are also other Components:

Wages are Deflating,
Labor Force is Inflating,
Monetary Policy is Inflating,
Fiscal Policy is Inflating,
Welfare both Corporate & Social are Inflating,
Median Household Wealth is deflating,
Median Retirement Savings are Deflating,
MIC Spending is Inflating after adjusting for the end of Iraqi War,
Federal Police Powers are Inflating,
State & County Powers are deflating,
and looks like Local funding ability is Deflating as mixed financing becomes the norm and VICHY DC & VICHY Wall Street assume greater Roles in Financing.

And Political, Military, Economic Power seems to be held by those that are Elites or Working for Elites or Huge Transnational Corporations. The Power in the USA seems Centralized some few places and in these places there is little concern for the US Constitution & Individual Rights. The Power is just serving itself. This is much like US Wars. This is much like the US MIC. This is much like NATO.

The Answers have to be found in either US Congress or States or New Financial Associations composed of US States that wish to create the power to Finance their own Governments and Industry Growth. We know Small Business is the Core of the US Business and it has been trending down. We know there are fewer commercial Banks. We know more businesses have been closing than have been being created (Death's Cross). Even the Federal Government has Small Business Programs to help Small Business, but looks like this is not being effective, discussed, or implemented well.

Clearly there needs to be ever more pressure for Transparency in Business & the FED & the Banks & the Federal Government. Auditing. Follow-up, Tracking, Reporting, Blogging, on US Audits and Auditing Practices.

Is there a place for Public Banking? Private Banks are going though a Highlander Process of Singling up. Private Banks don't lend when the Economy is Soft, when the USA & All Countries need Investment. And how does VICHY Wall Street Spend most of it's Efforts, Proprietary Trading, Financial Schemes to leverage US Assets, Crazy Derivatives, Crazy Risk control activities to Hedge with Default Swaps? Are they working to start wars and Economic Collapse?

Was that a rant or did it successfully pull discussion away from expecting solutions from Central Banks.

Do you expect a fair shake at a Car Dealership?
Why expect the FED, VICHY Wall Street, or Giant Corporations to provide any Solutions at all?

Thu, 03/05/2015 - 15:05 | 5858351 fremannx
fremannx's picture

The distortion in the global economy is from mal-investment, a known result from too much debt accumulation caused by easy money policies and accomodative interest rates. It's a debt bubble on the verge of bursting wide open.

http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...

Thu, 03/05/2015 - 23:29 | 5858450 TeethVillage88s
TeethVillage88s's picture

Right I have to run out the door and can't read the article.

Malinvestment in my mind is very specific economic term.

But probably I think of Proprietary Trading, Financial Schemes based on having lots of cash, derivatives of many kind, leveraging assets in a tranche or portfolio based on mark to market equity increases.

I don't really know much about Malinvestment, so I have to get back to you on this.

Late Add: We could probably say Stock Buy-backs, and corporations hoarding cash for executive compensation and preferred investors instead of investment in capital facilities and Capital Equipment qualify as Malinvestment... but then I am reaching out of my expertise.

"In Austrian business cycle theory, malinvestments are badly allocated business investments, due to artificially low cost of credit and an unsustainable increase in money supply. Central banks are often blamed for causing malinvestments, such as the dot-com bubble, and the United States housing bubble. Austrian economists such as Nobel laureate F. A. Hayek advocate the idea that malinvestment occurs due to the combination of fractional reserve banking and artificially low interest rates misleading relative price signals which eventually necessitate a corrective contraction—a boom followed by a bust.[1]"

Late Add:

This all has something to do with historical fact that when England was able to Centralized Control of it's Kingdom this lead to the Modern English State or Empire. In other words having a strong Central Government can ensure a Strong State Military, State Economy/Treasury, State Banking, and consolidate power Politically. It has to do with the House of Plantagenet and Tudor Dynasty. I think this is the Deep Reason for our Military Republic in the USA and Creeping Centralized Power.

https://en.wikipedia.org/wiki/House_of_Plantagenet

Thu, 03/05/2015 - 19:54 | 5859202 essence
essence's picture

While ZH itself  is a great resource, in my experience the comments need to be combed thru to find relevancy.

My rule of thumb when scrolling down is that less than two paragraphs likely isn't of significant importance (condolences  to all who thought of their one or two line zinger as pithy).  If you can't devote the energy to post a substantial post, then why should I bother to consider it.

Addressing this particular comment from Teeth8803/05/2015 - 13:55
... the observation given to you that the BIS was of more importance than any prevailing  local solution was insightful. Insightful as in probably correct.

Over the previous decades power has been pulled into the core. What could be more "core" than the BIS.  The BIS even out Feds ... the FED. In true elite manner, they operate behind the scenes, and INCREMENTALLY.

Yes, the solution obviously is power disseminated locally. That would be the most robust, responsive and 'anti-fragile'. Only that is heresy to the psychopaths trying to rule the world centrally.
Politicians, legislators,congresses,parliaments,judges,regulators, bureaucrats, PMs & Presidents can all be bought/threatened/compromised . Who better in a position to 'own' them than those who control the creation of money-credit itself. Look to who controls the CBs and TBTFs and you'll discover our true rulers.

Addressing your "rant",  I would think Public Banks would be quickly corrupted unless the powerful elements-that-be were constrained from acting. There's even another, highly relevant side to it (see Jeff Nielsons article today on Sprott Money titled Debt-Free Money: Not a Solution").  As for too many in the labor force .... that would seem to indicate too many humans for the amount of energy and resources currently available (oops ... did I just offend many... get used to it).

To be honest, I can't say what the solution is in Detail. Perhaps a combination of FOFOA-ism, Mises and Ron Paul.
My own personal belief is that Power is best left to Individuals & local communities ... with decreasing power as government scales up to regional and federal levels. That pertains to the money system too.

Ahhh... but the devil is in the details.

 

Thu, 03/05/2015 - 20:12 | 5859439 TeethVillage88s
TeethVillage88s's picture

I have to admit I need to read more of the available articles on the BIS. I see BASEL III comes from a similar committee of Central Bankers... maybe the BIS Mission Statement doesn't cover other issues Central Bankers are trying to take on as a Group and probably eying for inclusion in future EU, US, Transatlantic and Transpacific Treaties.

Yes, without sweeping reforms in the US Congress I can't see Public Banking being a lasting solution. I have no clue if a Article V conference could provide a lasting solution either... nor a US Constitutional Convention. Power exists in many associations, groups, networks and will flow dynamically toward and citizen movement or social movement to take it over as we saw with the Tea party.

Also had a thought to mention the Meme Of Privatization is just another power grab focused on existing Federal Funding Lines. Much better to shrink MIC Spending than sign long term contracts for GE, KBR, Halliburton, AT&T, CISCO, or anyone else. Typically Defense Contractors double or triple costs promising new efficiency but Scope of Works tend to be narrowly written with few deliverables. Anyway I have the idea that Computer, Network & IT Contracts are the most inflated of Federal Government Expenses.

So, yeah implementation is very key. Follow-up an auditing is very Key.

I will keep my mind open to your ideas above and try to locate the article, Sprott Money, titled "Debt-Free Money: Not a Solution. I will also keep my mind open to completely rethinking the US Banking System and the possible right of all people to have credit and access to money... free from the clutches of Banks or even government Taxes on any credit that I request or receive.

Banks somehow have convinced government and citizens that we need them and must pay through the nose.

Thu, 03/05/2015 - 14:56 | 5858326 fremannx
fremannx's picture

Former Federal Reserve Chairman, Alan Greenspan is predicting economic collapse and tried to defend the Fed's role in the coming debacle.  Greenspan, told CNBC that the U.S. economy is the weakest it has been since just after the Great Depression. But it’s not the Fed’s fault, fiscal policy is to blame. 

http://www.globaldeflationnews.com/greenspan-blames-u-s-government-for-e...

Thu, 03/05/2015 - 15:03 | 5858345 Longduckydong
Longduckydong's picture

2 key changes - The rich are approx 100% richer and bank balance sheets are much stronger to weather a market shock in asset prices.

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