The Superhero Powers of Central-Banking-Policy Man

"There was an idea to bring together a group of remarkable people, to see if they could become more. To fight the battles we never could."

So growls Samuel L.Jackson in the trailer for the new Marvel Comics Avengers movie. Just to be clear, he's not talking about central bankers.

"Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the US economy," admitted US Fed superhero Ben Bernanke last October, failing to turn green and burst out of his shirt.

"There's a limit to what monetary policy can hope to achieve," agreed the Bank of England's Mervyn King the following month, also lacking X-ray vision or even just a flowing cape. "Monetary policy cannot do everything," sighed the ECB's Mario Draghi, speaking to the Financial Times in December without crushing anything using just his bare hands.

Why so weedy and weak when the world needs superheroes instead? "Maintaining price stability and financial system stability are important goals of central banks," said Bank of Japan governor Masaaki Shirakawa in January. "But central banks are not able to solve all problems," he added – making a full house of all-too-human heroes at the big four central banks – "especially in an economy characterized by zero interest rates and deleveraging."

Such defeatism ill-suits central bankers' superhuman powers today. Long ago, "the Gold Standard determine[d] the money supply," Dr. Bernanke told his George Washington students (and anyone who'd listen on the internet) last month. So "there [was] not much scope for the central bank to use monetary policy to stabilize the economy."

Since then, the crazed professors' mad-cap experiments have broken out of the lab. Yet central-banking-policy-man still finds himself unable to fix the economy, even though both the cost of money and its supply now lie entirely within his gift. Handed such awesome control over a nation's destiny, "I care not who makes its laws," as various members of the Rothschild banking dynasty might have said (or not) in the early 19th century. Yet here sit Bernanke, Draghi, Shirakawa and King today, with barely a laser-glove between them, apparently chained to a lump of kryptonite, and all unable to reverse the spin of the earth on its axis.

So what is it that central bankers can achieve with their extraordinary powers?

"Of course, the inflation forecast is higher now than it was...precisely because rightly we did more QE," said Bank of England voting member Adam Posen in a press interview last week. You'll note that word "rightly".

The arch-dove of Threadneedle Street, Posen this month failed to vote for yet more quantitative easing – a decision he feels he should come out and defend in public. Twice. Not because anyone thinks he should have printed more money instead, pulling the big lever marked "inflate" to buy more government bonds, push up gilt prices, and drive down interest rates further below the pace of inflation. No, Posen chose to defend his "no change" vote because it was so out of character.

After joining the Bank of England's policy committee in September 2009, Adam Posen voted to expand the UK's money-creation scheme at 16 of the 31 meetings he attended to March 2012. His fellow policymakers backed his call only twice, but that was enough to take the total up to £325 billion – well over 20% of the UK's annual economy, and equal to more than one third of all the UK government debt now in issue.

The effect? Never mind that Posen finally changed his vote this April. As his governor and the other three chief central bankers above all confess, creating money and handing it straight to the banks did nothing to fix the economy. But the one sure outcome, as Posen noted this week, was to send Consumer Price inflation sharply higher – well above the Bank of England's official 2.0% annual target in fact, and sharply above its 10- and 20-year averages, too.

Indeed, on the old, more comprehensive Retail Price Index, inflation since March 2009 – when "quantitative easing" was first applied in the UK – accelerated from its one- and two-decade averages in 11 of the 14 separate item categories compiled by the official data agency (food, clothing & footwear, household services etc). Excluding mortgage-interest payments, the once-authoritative RPIX index has risen 4.5% per annum since March 2009 against 3.1% since 1992 and 3.4% since 2002.

Is anyone amazed by such exploits? Exploding the money supply can't be guaranteed to destroy the value of cash, as Japan's experience over the last decade shows. But crushing the purchasing power of people's income and savings is a more certain power for central bankers to summon up than anything else. In the final analysis, "under a paper-money system, a determined government can always generate higher spending and hence positive inflation," as Ben Bernanke concluded his infamous "Deflation" speech of Nov. 2002.

The hard thing – the superhuman task – will be reining that inflation back in.

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About the Author
Adrian Ash

Adrian Ash runs the research desk at BullionVault. Formerly head of editorial at Fleet Street Publications – London's top publisher of financial advice for private investors – he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to a number of investment websites.

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