Central banks took over business cycle policy

Central banks took over business cycle policy

by Prof Dr Eberhard Hamer, “Mittelstandsinstitut Niedersachsen e.V.” (SME Institute Lower Saxony)

The big bang of the ECB’s decision to flood the money markets with more than 1 trillion euros in order “to prevent deflation and revive the euro economy”, shows a profound change in the distribution of economic tasks between governments and central banks.
According to the German “Bundesbank” Act, the Central Bank is indeed called upon “to support the Government in economic policy”, but the bank is theoretically completely independent. It is only committed to monetary stability and could therefore also take measures that are not in line with or  even contrary to the policy of the ruling Government. The independence of monetary sovereignty was seen as a key concern when the “Bundesbank” was established – just as if it were a fourth neutral power in the state. Thus, it should be prevented that – a s was the case during Hjalmar Schacht’s time – the Central Bank could be misused as a subsidiary organ of the Government. It should merely ensure, by guaranteeing monetary stability, the citizens’ confidence in their currency, in their savings and their pensions.
This focus on ensuring the monetary value and an independent “Bundesbank” at the same time was unique compared to all other central banks – borne out of the German past bad experience.
This was different with the Fed (Federal Reserve Bank). It is independent of the government insofar as it is owned by private banks, which also propose the Central Bank Chief, who must then be appointed by the US president. The particular interest of the Fed is therefore not monetary stability in general, but follows the interests of its owners. This became obvious e.g. in 2008, when the Fed had to save many banks and insurance companies in the United States which had ruined themselves by gambling, by starting the money-press to neutralize the banks’ debts.
At the same time, the Fed is also regarded at the spearhead of US monetary policy, which is directed by the financial industry. Since the dollar has become  the world’s reserve currency at more than 70%  and since Nixon had repealed the convertibility of the dollar into gold as well as the state’s liability for the currency in 1971, dollars were augmented without any inhibition to gain, thus debt domination was achieved over 200 countries in the world – this way creating the dollar empire, which also controls most satellites currencies, among them  the Euro.
The “Bundesbank”, however, because of its focus on monetary stability, did not fit into this system and was  a nuisance mainly in Europe, because the other euro-countries were not tied to the leach of currency stability of their central banks. Conversely, they were able to impose their debts wishes on their central banks. Thus, the German Mark was an anchor of stability for Europe, whereas the devaluation of the other national currencies even more devalued by debt,  such as the Italian Lira, French Francs or Spanish Peseta, became visible in relation to the D-Mark. In other words, the other European currencies were depreciated against the D-Mark, a situation which drove the international capital out of the soft currencies into the strong D-Mark. This made the D-Mark become a stronger world reserve currency at the expense of the dollar and revealed the other European currencies as secondary soft currencies.
No wonder that not only the United States but also all European countries wanted to break the dominance of the “Bundesbank”. The Euro project, with the ECB in particular, was meant to neutralize the “Bundesbank”.
Theoretically, the ECB must also serve monetary stability, but in practice it has been increasingly reversed the polarity towards the political wishes of the Euro-member majority. Increasingly it was also subjected to the wishes of the US high finance and the Fed, particularly since the former Goldman Sachs employee Draghi took command. This was evident in 2008, when the ECB as well as the Fed, had to finance bailouts for European banks that had ruined themselves by gambling. As the German representative in the Governing Council with only one of 27 votes had not more weight than Malta, thus he could not stop the desire for debt relief by the debt-ridden banks and South European countries. Therefore, unfortunately with the consent of Germany, the unrecoverable debts of the ruined banks and Southerners were transferred into the bailout Rescue packages – practically speaking on the European taxpayers backs – and at the same time enabled the over-indebted banks and countries to further  credit taking out of the bailout packages  and  the target lending.
In the first crisis Greece’s debt amounted to 180 billion, of which 100 billion were waived. In the bailout Greece received additional loans of 240 billion euros only after promising to carry out certain reforms without corresponding benefits, so that the debts are now up to 320 billion. Greece will never be able to repay these debts and is even incapable of paying the normal interests.
Although actually under ECB statutes public financing is excluded and also a further liability for the debt-ridden euro-countries by the healthy countries was excluded by the Lisbon Treaty, the ECB has broken both barriers with the consent of all euro-governments. Because most euro countries cannot or do not want to take austerity measures for political reasons, the ECB went on to open public financement by flooding the financial markets as announced in January 2015. It buys junk securities or bonds of severly indebted countries from the banks, for which no one will give credit any longer. Especially for over-indebted countries the increasing debts are still financed this way.
The argument of the ECB, one must prevent deflation, is just a pretext and theoretically incorrect:

  • Only for reserve currencies such as the dollar, foreign money may be drawn into the country by the increase of the money supply and deflation may be prevented. But the Euro is not a reserve currency.
  • As shown by the examples of Japan and South American countries, no recovery of the economic structure can be obtained by additional money injections, but prevents recovery outright, because the money injections encourage politicians to continue with piling up debt rather than to start politically difficult reforms.
  • Just as additional drug injections do not cure, but only lengthen and enlarge addiction, money flooding does the same with debts.
  • The examples of Greece and France show that the states cannot be healed with granting credit, but get into over-indebtedness, which must be corrected not only by adaptations, but by a currency reform.
  • But because the ECB and the healthy euro-countries have adopted total liability due to the bailout for the debt of insolvent countries (Germany is liable for a third of it) the upcoming event of the insolvency of states because of the Euro is not only their problem, but the problem of us all. So we have the “joy of the common ruin” operated by  total liability.

Analogous to the private sector, the problem with low debt is with the debtor, but in case of over-indebtedness, it becomes a problem of the creditor and the debtor can then blackmail its creditors with the threat of insolvency. That’s how Greece is acting just now:

  • 240 billion out of the 320 billion euros debts are in bailouts rescue packages, the rest at the ECB. If Greece would declare bankruptcy, for example, the liability of Germany within the bailouts – contrary to Schäuble’s assurance (“a guarantee is not a payment!”) – would  result in the payment obligation of approximately 80 billion euros, therefore building up additional German debts. And the ECB would have lost their equity and would demand additional money from the euro-countries (additionally about 100 billion euros from Germany). Germany might still be able to meet this foolishly accepted obligation, but most European countries can no longer do so. Hence there is no way for a payment waiver for Greece; one will know how to help the situation by extending the time period of the 320 billion euros debt to a hundred  years – that  means forever – so  one does not have to write them off.
  • But still this does not help Greece and France. Both need fresh money, so the ECB must buy further government bonds from them and the Euro money supply will continue to expand (further drug injections).The ECB has accordingly taken over the responsibility for the business cycle policy in Europe and also temporarily exempt debt rescuer governments of hard financial corrections in their countries. Both measurements offend against all existing treaties and statutes, as well as against any economic reason and against all economic theoretical insights.

Now the question is just how long the ECB still can postpone the rehabilitation corrections of over-indebted countries, which have been made necessary by the money flooding:

  • As with any drawing and redrawing and as with any addiction, abuse with the injection of cash from the ECB is also only good as long as especially strong liability and contributor countries are still willing to participate. In case the Federal Constitutional Court would prevent further assumption of liability of the Federal Republic of Europe’s debt orgy, the ECB can no longer flood and the orgy will be over. The same applies if the majority of the population in the solid countries oppose the liability for the debtor countries.
  • By the money flooding FED and ECB have also pushed the interest rate towards zero artificially, i e virtually eliminated the regulative effect of  interest in the financial markets. This will not succeed much longer because rising interest rates in developing countries increasingly attract international capital and thereby also force a rising interest rate in the US and Europe. Only 2% higher interest rates will have the consequence that more and more over-indebted countries – including  the US – will  become illiquid and therefore insolvent.
  • Savers and those who worry about their old-age pension, are increasingly unwilling to have  their savings expropriated. So the collection of capital dries up, which should also lead to higher interest rates.
  • Flood of money and zero interest rates have already resulted in bubbles (stock exchanges, real estate, private markets). A bursting of one of these bubbles such as the real estate bubble in the United States or in Spain, will lead to correction crises and perhaps again to a crash.
  • As the example of the US shows, an economy cannot be carried on the long term without structural reforms only by the money flooding. There, three US dollars additional money supply led only to a one dollar  economic growth.

The money flooding of the ECB is therefore

  • useless, because it brings no long-term recovery of debtor nations and the monetary system,
  • absurd, because it increases the mistakes of the financial and real economy, rather than stopping it,
  • politically counterproductive, because governments are no longer under pressure to implement structural reforms and instead have the opportunity to continue financing unproductive corruption and social promises.

A drug addict must perish and will not be cured if the withdrawal of the drug is not demanded. Likewise, a sound currency, a healthy financial system, a competitive economy and a solid economic growth are only possible if the money flooding, zero interest and acceptance of liability for the unsound countries by the solid countries are stopped.
The ECB under political pressure has decided to give up the stability of the Euro in favour of an unproven economic stimulus. Because the debt maker states have the majority on the ECB Executive Board, the market forces (for example interest rate increase, bubble explosion or other) must finally end the flood of money and force a currency reform.
This is exactly what has been announced by the former Fed Chairman Alan Greenspan, that from the collapse of the dollar and Euro will arise the new world currency unit “Euro-dollar” with the new financial centre BIS (Bank for International Settlements, Geneva). To this end, the US high finance acquired the shares of the BIS in time in order to be capable of  privately governing  the next world monetary system – as it did our old one – and of  abusing it to enrich themselves again.1
How can we protect ourselves privately against this development?

  1. Who knows, that interest rates will rise again, must free himself of debts or at least reschedule so that he no longer needs follow-up financing.
  2. No longer investing in money values (no funds, no stocks, no life insurance, no amounts of cash ...)
  3. Flight into tangible assets, as long as they are reasonably priced yet, for example, where there is no real estate bubble, precious metals,  buying durable goods already now.
  4. Conversion of old age pensions on to return  assets such as, for example, rents, leases, corporate investment income.  •

1    see more detailed: Hamer, E.: “Der Weltgeld-Betrug”, 4th edition 2012 and id., “Was tun, wenn der Crash kommt?”, 1st edition 2001, 10th edition 2008

(Translation Current Concerns)

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