J. S. Kim – The Role of Central Banks
Posted by Orrin Woodward on October 1, 2009
Here is an informative article from J. S. Kim, one of the best minds on economics and government policy in the marketplace. Mr. Kim has consistently beat the market and, like Peter Schiff, studies the underlying principles behind government policies to predict accurately. We need less rhetoric from our government and more principle based leadership. I encourage everyone to start educating yourself on Austrian Economics, because it is the only economic training that has consistently predicted the effects of government intervention.
I posted an interview with Mr. Kim that explains his investment strategy. The underlying principles reveal that the relationships with Government and Central Banks are more important than serving the customer. This is another example of the end of free enterprise and to corporatocracy worldwide. The totalitarians lost the cold war, but are winning the economic war. This is not a good trend for freedom loving citizens of the world. Mr. Kim states that the Central Banks are more powerful than any government in the world! Throughout history, debtors are in bondage to their creditors. We cannot afford to remain ignorant of this slide into government ownership and control. God Bless, Orrin Woodward
All global economic problems today are rooted in the existence of Central Banks and their commitment to an application of destructive Keynesian economic theories to our global monetary system that simply has not worked for the better part of this century. Within the realm of academics, monetary policy, politics and media, there is a persistent refusal to acknowledge the primary role Central Banks undertake in artificially creating boom-bust cycles that would not occur in such severe fashion were Central Banks simply willing to step out of the way and allow free market forces to operate.
If you ask anyone who graduated from Wharton, Harvard or Oxford, or any number of other Western universities, with a degree in business or economics, who Alan Greenspan is, I guarantee you that he or she knows (I myself graduated from the University of Pennsylvania). However, ask them who Friedrich A. Hayek is, and I doubt if anyone knows. Yet those of us that adhere to Austrian economic theories have used our understanding of sound monetary principles to accurately predict all steps of this crisis since 2006.
So how did I learn about Austrian economic theories despite never having heard of Friedrich A. Hayek during my entire 18 years of schooling? For the last 15 years, I taught myself what the institutionalized formal educational system refused to teach me. Despite the successful accuracy of our past predictions, even today, we are summarily dismissed as crazy “gloom and doomers,” while those that steadfastly adhere to Keynesian economics principles (all Western Central Banks as well as the governments and politicians they control), upon reflection, are the ones guilty of the predominant body of wildly inaccurate, unsound, and failed predictions over the past 3 years. Need a sample? How about the US housing markets being fine and properly valued? How about the US being on a path to full employment? How about strong future economic growth and a boom in US exports? Though in hindsight, these predictions sound more like the ramblings of a madman, these predictions were all made by our current Federal Reserve Chairman, Ben Bernanke, in 2005 and 2006.
In reality, if we strip away the divisive jargon of politics, gloom and doomers are not the perpetual pessimists we have been inaccurately and unfairly portrayed as by the media (for even I told my clients just five months ago that a 1,000 point rise in the DJIA was entirely plausible though the Dow’s climb has admittedly been twice my expectation since). In reality, we are merely strong proponents of the Austrian School of Economics. In the Western sphere of academia, the principles advocated by the Austrian School of Economics have been so silenced that most of us who graduated from Western institutions of education with MBAs, graduated never having heard of Friedrich A. Hayek, one of the pioneers of the Austrian School of Economics. This, despite the fact that his economic principles are so important that he is the most quoted economist in the acceptance speeches of Nobel Prize winners in economics.
In fact, by cleansing banking history and monetary policy in all textbooks of any honest discourse about the Austrian School of Economics, Central Banks have even shut out nearly all Western educated young men and women from possibly understanding the true roots of this crisis. The reason for this is simple: If people understood Austrian economic principles, there would be instantaneous revolt in the Western hemisphere against the loony monetary principles enforced upon us by Central Banks. Ignorance is the great pacifier. Those who are ignorant of Austrian economic principles and most hurt by the financial oligarchs that inflict Keynesian economic policies often the economy often serve as their staunchest defenders and apologists. For example, the retail investor who defends current stock market rallies in China, Europe and the US as “fundamentally sound” and “sustainable” will be the first person to be wiped out when these rallies ultimately and necessarily crash.
It is an absolute lie when the media and financial executives stated last year that no economist foresaw the blowback of decades of loose monetary principles that created the perilous situation the world suffered in 2007 and 2008. And when they tell us that this crisis has bottomed, this is a lie too. It is true that no Keynesian economist forecast this crisis; however, there were plenty of Austrian economists who forecast nearly every step of this crisis months and even years before this crisis unfolded. I, myself, back in September of 2006 started writing about a “Peak Investment Crisis” and I was hardly the only one who foresaw the depth of this crisis more than 3 years ago.
Furthermore, one could review the very public predictions of self-proclaimed adherents to Austrian economic principles such as Jim Rogers, Max Keiser, Ron Paul, Peter Schiff and many others for the past 3 years as well. I am very confident that you will find that strong proponents of Austrian economics were well accurate in the majority of their predictions while all of our banking and political leaders were atrociously inaccurate in their predictions as a group. Given the huge chasm in the accuracy of predictions between proponents of Austrian and Keynesian economics, were it not for a realization that the media are shills for the financial oligarchs, it would indeed by perplexing to try to understand why they continue to marginalize the accurate predictors as “gloom and doomers” and continue to heap praise upon the atrociously poor predictors. I, for one, refuse to give power or credibility to the term “gloom and doomers” as it surely is a favored discrediting tactic of the financial oligarchs that rule the US Federal Reserve and the world’s other Central Banks.
The US Federal Reserve has always been eager to re-inflate collapsed asset bubbles with cheap credit and ultra-loose monetary policy (just reference the actions of the US Central Bank, post-crash, after the 2000 dotcom stock market crash, and the more recent US housing crash). In the face of a runaway asset bubble, however, Central Banks have always been reluctant to rein in the flood of malinvestment created by their loose (and damaging and foolish) monetary policies by raising interest rates. In fact, the only time that I can recall the US Federal Reserve proactively, instead of reactively, attempting to curb inflationary bubbles was in the late 70’s and early 80’s, when they raised the Fed Funds interest rate to 20.00% in order to serve a larger private agenda and prevent the US dollar from collapsing.
But today, eager to reinflate the stock market after the US housing market plunge, they have successfully re-inflated the US S&P 500 to a P/E valuation that, for the last four months, has been 7.5 times higher than its historical average of 17.79. And as usual, the US Central Bank stated yesterday that they have no interest in stopping this runaway malinvestment bubble either as they stated they will leave interest rates near zero for the foreseeable future.
Central Bank policies, as usual, only serve to postpone and exacerbate the problems that their loose monetary problems create by engineering illusory recoveries that are entirely borne out manipulating the monetary system that they control, but that have zero basis in fundamentally sound economic principles. What do I mean by this? It is quite simple. When economies struggle, Central Banks never seek to solve the root of the problem, but instead, choose to artificially cut interest rates due to Keynesian economic theories, even when free market dynamics call for no such actions. Consequently, a flood of cheap credit leads to spikes in investment borrowing solely due to cheap credit and not because of the existence of appealing investment opportunities that offer good growth prospects.
The flood of easy money that Central Banks create now needs a home, as investors don’t borrow money to earn less than 1% annual interest in a bank savings account. The home, outside of entrepreneurs who may reinvest this money into their own businesses, is either the real estate market or the stock market. In the case of the stock market, since the stock market was not demanding more new money but has been force-fed new money, it continues to absorb the excess liquidity artificially created by Central Banks even when stocks are already fairly valued and even overvalued. This is Central Bank force-fed malinvestment, not economic recovery, and outside of the manipulation of Wall Street high frequency computer trading programs, this is precisely how we ended up with an S&P 500 with a P/E over a 133 for the last four months.
In reality, if free markets were free of Central Bank meddling, and allowed to function and set interest rates, proper interest rates would be set, and the appropriate amount of borrowing and investment or disinvestment would occur in US stock markets to achieve a healthy valuation of stocks. Instead, when Central Banks’ artificially create excess money that free markets do not demand, excess money chases poor investments, distort asset prices, and create an extended period of malinvestment. So while periods of malinvestment can last for exceptionally long periods of time as long as Central Banks keep shoving cheap credit down the throat of the economy, the “economic recoveries” they produce are unsustainable and therefore nothing more than prolonged periods of ill-advised malinvestment. Under these conditions, every higher rise is, in reality, nothing but a greater distortion and move away from fair market values that plant the seeds for a future disastrous and inevitable crash that cannot be prevented.
A recovery under these conditions, commonly and erroneously referred to by the media as a “boom”, is not a “boom” at all, but a mass distortion of prices not set by free market forces of supply and demand, but deliberately engineered by foolish Central Bank monetary policies that successfully “bait” foolish individuals and institutions. History tells us that malinvestments always end up in busts. Not in small corrections and further sustainable growth for the next five years as Keynesian economists would want you to believe, but in spectacular busts. This is why I can be 100% sure that a spectacular bust is in the future of the US stock markets and that the only question that remains is the timing of this bust.
And when the bust that is inevitable occurs, you can be 100% sure that the financial shills that are our mass media will once again erroneously describe the “bust” as an “unforeseeable event”. Through the lens of an Austrian economist, this bust is necessary as it is part of the market’s self-healing process whereby it sheds itself of the distorted value caused by prolonged malinvestment and returns assets to their proper fair market valuations. Of course, in the process of the bust, panic often ensues which depresses assets below fair market valuations.
In fact, if one just switches the media’s descriptions for stock market rises and gold and silver market rises, then one would have a correct representation of reality. Stock market rises that are described as sustainable and healthy are more apropros descriptions for the rises in gold and silver markets, whereas the speculative bubbles they use to describe gold and silver markets is a more fitting description for the stock markets.
For the reasons described above, I am 100% certain that the reinflation of the US stock market, the Chinese stock markets and the European stock markets will all end up in disastrous busts. People don’t understand that the predictions made by the small handful of us who advocate Austrian economic principles are not driven by a genetic propensity towards pessimism. To the contrary, our predictions are driven by the logic of real world application.
For the last century, Central Banks have interfered with free market forces and imposed loose monetary policies that have led to the formation of asset bubbles that were unsustainable in nature. In every single instance, these bubbles did not undergo mild corrections and further periods of sustained growth, but all eventually experienced spectacular crashes. Thus, the continued application of the same strategies by Central Banks today are already predestined to fail in the same manner. To call Austrian economics a “doom and gloom” economic theory is a great miscarriage of justice. If its sound principles were applied by world governments, then sustainable steady growth could be achieved without the cycles of boom and bust we experience every four or five years.
If the media insists on playing the role of financial shills and calling advocates of Austrian economics “gloom and doomers”, the least they could do is reciprocate and label Central Banks and all proponents of their monetary policies as “psychopaths”. Though one may believe such a label to be unduly harsh, the clinical definition of a psychopath is one who regularly engages in antisocial behavior and exhibits a chronic disregard for ethical principles. When Central Banks continually engage in the same loose monetary schemes when they already know that the end result will be massive failure, this behavior embraces the clinical definition of a psychopath. What the people have failed to realize for the better part of this past century is that the private families that own and operate Central Banks have reaped great rewards from creating these massive failures, with the cost being the great destruction of a nation’s wealth.
Henry Ford once reportedly stated, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, there would be revolution before tomorrow morning.” One thing we have learned today is that Central Banks have insured that the people of our nation still do not understand how our banking and monetary system works. For if they understood, they would not be following the road to destruction that is deliberately being paved for us by the US Federal Reserve, not dissimilar to the behavior of suicidal lemmings that follow one another off the edge of a cliff.
One tenet that all Austrian economic adherents would support that will never receive any acknowledgment from Keynesian economists is the following: Central Banks are a burden upon all humanity, and that until all are banished from this Earth no progress in economic or political freedoms is possible. It is an absolute myth that Central Banks are necessary for sustainable economic growth and that in their absence, anarchy would reign. There is no historic proof of this. In fact, during periods of history when Central Banks did not exist, much greater economic stability and sustainable growth persisted. If humanity were successful in shuttering all Central Banks, this would be the greatest modern day gift to humanity as true “green shoots” – free markets, economic freedom, and a realistic chance to finally end poverty – would blossom. Central Banks are masters at creating illusory economic recovery, and as we know, all illusions must eventually crumble.