The Categorical Insanity Of Central Banking

Currency debasement. Asset price inflation. Booms, bubbles, and busts. Yes, folks, central bankers have succeeded at making full hash of the world at large. This goes for the Federal Reserve too.

Tracing back recent financial disasters we find the mortgage meltdown coincided with the Fed’s interest rate raising cycle. The Fed had dropped rates following the dot com bust and, in return, puffed up a massive housing bubble. So they raised rates to let some air out and – pop! – the bubble exploded.

The dot com bust also coincided with Fed rate hikes. Rates had been dropped to bail out financial markets from the Long Term Capital Management fiasco and to stem contagion from the 1997 Asian financial crisis. The cheap credit was then channeled into the delusion that the internet would make everyone rich.  So the Fed raised rates to impart some reality back to the stock market and – kaboom! – the Pets.com sock puppet was blown to bits.

And on and on these Fed exacerbated bubble and bust cycles go back through the decades. And maybe these failures are all in the past.  And maybe they are of little significance to our present complications. And maybe the Fed will, this time, get it right.  And maybe pigs will fly.

The hopeless truth is, central bankers always botch it. For example, this week, following the Federal Open Market Committee’s (FOMC) January meeting, the FOMC announced it would continue to price fix the federal funds rate at 2.25 to 2.5 percent.

Is this the correct rate? Is this the incorrect rate? Given that it was decreed by a focus group of central planners – as opposed to a real open market – we can assure you that it’s completely and utterly incorrect.

If you don’t already get this, you probably never will. So here’s what you need to know: The Fed always explodes financial markets and central bankers always botch it.

A Downright Disgrace

This premise, no doubt, is obvious and indisputable.  Still, like witnessing a slow-motion train wreck, we can’t look away. The ongoing disfigurement is transfixing…and has extended to every corner of the globe.

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