Confidence in central banks’ monetary maneuvers is fading, and the fallout could wind up hurting folks on Main Street.
James Grant—noted Wall Street pundit and the editor of Grant’s Interest Rate Observer—made a startling observation this week. In a Q&A session with a Swiss business paper, Grant indicated that one of his fears is that the world is losing faith in central banks and their ability to manage monetary systems. I could not agree more.
In continuing to write about central banks, I recently refreshed my memory about some comments I made on my “Financial Issues” program in reference to a G-20 meeting five months ago (See a video here). While central banks may not have much credibility left to lose, all signs point to them being increasingly marginalized and insignificant.
The sovereign debt of governments around the world continues to grow. In addition, the creation of this debt continues to be one of the more irrational actions that governments are taking—especially when you consider that none of it is helping stimulate their economies.
Productivity has continued to decrease, and today we see gross domestic product (GDP) growth for the second quarter at 1.1 percent. Italy, from a technical standpoint, is bankrupt. Deutsche Bank CEO John Cryan has announced that negative interest rates are likely to be fatal to the economy; this is not just a statement about Germany. And from an economic perspective, nothing has changed in a positive way in the last two months.
The high valuations of stock are in direct opposition to the low valuation of the Federal Reserve, as Janet Yellen continues to be the market watcher, knowing that the market is the only real tool that the Federal Reserve has, as much as they try to deny it. Worse yet, even though she has not given the markets reason to believe that the Fed’s predictions and assessment of the economy are accurate or even credible, the markets still react to her claims that things are improving.
Danger of Complacency
It is hard to believe that, in some areas of the world, banks are paying central banks for the privilege of being able to go to their lending window in the hopes of raising inflation to 2 percent or higher. This is especially remarkable, considering the central banks’ arrogant, irrational attitude that they will control inflation and keep it right where they want it.
In reality, central banks have become so complacent about the debts governments have run up that they have managed to convince themselves that “it will all work out” once the economy starts to grow.
What they have failed to notice is that everything they’ve done to date has not created any growth in these economies. What’s worse, they have passed a tipping point, where normal growth will not be enough to help them grow their way out of the red ink. And yet, somehow, through the last seven years, central banks have managed to convince the general public that they remain relevant.
Central banks have also convinced economists and markets that they have saved economies by continuing to push them along a very steep climb to recovery. Unfortunately, most have forgotten that at the top of the hill there is a cliff—and it’s not likely that the central banks will be smart enough to stop pushing.
(Read Dan Celia’s CNS column, ‘Smoke and Mirrors, the Federal Reserve and America’s Economic Recovery Myth’)
Few will catch on, I’m afraid, until we see a 30 percent drop in U.S markets—and even worse in other parts of the developed world.
Every time the central banks make a move, it appears to be an act of desperation, primarily because we have watched the Eurozone do everything possible—including negative interest rates—to bring up inflation. It hasn’t worked.
Likewise, during a time of so-called full employment in America, we see the Federal Reserve make a real step toward raising interest rates—all while the Fed knows the real numbers, even as we see a bit more inflation in other parts of the world.
The fact of the matter is that the underlying fundamentals of the economy—especially America’s—are still in trouble. And they will remain stuck until we see a consistent growth rate in the U.S. gross domestic product of more than 3 percent, and until we start to see labor participation rise again to 21st-century levels instead of being mired in the late 1970s.
The basics still make a difference, no matter what snake oil the central banks try to sell us.
Dan Celia is President and CEO of Financial Issues Stewardship Ministries, Inc., and host of the nationally syndicated radio talk program “Financial Issues,” heard daily on more than 600 stations across the country. To learn more, visit www.financialissues.org.