Central Bank Fireworks Are Just Around The Corner

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/7/4_Central_Bank_Fireworks_Are_Just_Around_The_Corner.html

If I show up at the grocery store to buy gallons of milk with counterfeit money and I tell the manager that the bills came from my printing press located in my home’s basement, he will call the police, not his suppliers to have them ramp up the milk production supply chain.

However, it is illegal not to accept a central bank’s money.  Therefore, prices increase because the market has lost faith in the currency’s purchasing power.  Unfortunately, the Fed is working very hard to destroy the global confidence in holding the world’s reserve currency.  But it now seems Bernanke isn’t alone in his quest to hold the title of ‘Counterfeiter in Chief.’

However, when a central bank prints money there are two sides to the equation.  On the positive side, money printing, when done on the margin, lowers interest rates and reduces borrowing costs in the economy.  That provides debt service relief to borrowers and can encourage people to take on even more debt—which isn’t such a good idea, but can boost short-term growth.

On the negative side of the equation, savers are punished and rising prices erode the purchasing power of the middle and lower classes.  That’s because they see the newly created money last—if they see it at all. 

When an economy is in a balance sheet recession—as the developed world finds itself today--the economy must deleverage and will not take on much more debt regardless of how low the cost of money falls.  If interest rates are already at zero percent, there can be no further relief on debt service payments that can be attained by more money printing.

It is clear that governments need to allow the deflationary deleveraging process to finally run its course, rather than continue to artificially prop up the economy by expanding public debt and having the central bank buy it all up.