Central Banks’ Crusade Against Risk

To be sure: By putting to rest investor risk concerns – in the form of, say, credit default, liquidity, reinvestment, and horizon risks – central banks exert enormously distorting effects – which come clearly on top of the distortions resulting from a lowering of central banks’ key interest rates. Not only financial assets get increasingly mispriced. Capital goods and all kinds of commodity prices get also heavily distorted (as these goods are priced according to their discounted marginal value product).

If central banks get away with their current monetary policies, then the probably greatest economic and financial distortion the world has ever seen will be fabricated: malinvestment, price bubbles and over-leveraging on a truly epic scale, accompanied by a dwindling purchasing power of the currencies involved. A plausible near-term scenario: For major central banks around the globe have teamed up in an effort to keep the current boom going, and there should be little doubt that they will do whatever it takes to do just that.

The extreme downside scenario, if and when it kicks in, is no doubt very unpleasant. In the words of Ludwig von Mises (1881–1973), it is this: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”1

Fortunately, man’s future is not foreordained, as Marxian dialectic materialism wants people make to believe. On the contrary. Mans’ ideas and actions shape his future; fatalism is logically incompatible with his nature. Having said that, we have good reason to take side with Hans F. Sennholz (1922–2007), who noted: “[W]e are ever hopeful that, in the end, reason and virtue will prevail over error and evil."2 It is by no means an oversimplification to say here that the monetary problem in this world can be solved quite easily.

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