Central Bankers are Playing a Losing Game

by Matthew Melchiorre on April 30, 2012

in Economy, International

The supposed economic “recovery” is faltering. The sugar high of freshly printed money from the world’s central banks is beginning to wear off.

In RealClearMarkets, I address how misguided central bank policy led to Europe’s recession and I explain how to restore growth. Click on the previous link for the entire quantitative analysis.

Europe’s problem is the same as the U.S.’s - insolvency. The past 17 years have seen the greatest expansion of global credit in the history of the world. But this didn’t happen because the world economy became more prosperous. While the world was sleeping, central bankers around the globe have been printing money to fuel the booms of the past two decades. The inevitable result will be an even greater bust than the current one.

…manipulating the interest rate through monetary policy has immense distortionary consequences. The interest rate is the price of borrowing money. The amount of savings in an economy determines that price. But when central bankers set an interest rate, they decouple the interest rate from savings and replace it with politics.

The solution is to (pardon the cliché) stop the presses! Instead of being bailed out, malinvestment must be liquidated before Europe and the rest of world can hope to end the stagnation that almost two decades of excessive monetary expansion caused.

For a similar quantitative analysis of central bank policy and the U.S. recession, see my previous OpenMarket post on the matter.

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