Why central banks are the problem of the developed world, and how to fix them

When money is created, prices rise in total – in that there’s no question.  The question is where does the money go and what is it doing.

The CPI is a very flawed measure, excluding the main expenditures of the working class. Rent/housing is a fudge number, energy/gas, food, and ever-increasing health premiums are ignored. You can often see the CPI fall when rents and health premiums go up because the middle class has less to spend on other things that are in the CPI.

 When a central bank creates money – either through interest rate policy or quantitative easing, it is typically dispersed from the banking sector.  From there, it tends to artificially raise asset prices (housing, stocks, bonds) which benefits the wealthy while the middle class just sees rents rise while houses and retirement assets get further out of reach. 

 Even worse, central bank policy tends to give big business and artificial advantage over small ones, as startups tend to pay much higher rates.  When I created my own business using personal credit and the savings I had available, my APR averaged close to 15%. Meanwhile, fed rates were near zero and corporates borrowed at less than 4%. It also allows big companies to buy off their competition – which means losing a lot of “redundant” staff at a cost to middle class jobs and opportunities while the “savings” go to an ever smaller number of upper management and shareholders. Innovation is typically killed with reduced competition as companies start to farm sectors of the economy for cash rather than compete for market share.

In short, the central banks are the core problem of the developed world because they simply transfer ownership of the economy from the middle class to the asset-rich while stagnating growth through induced monopolization.  This is clearly seen as the GINI coefficient skyrockets, wages rise dramatically at the top while median incomes decline or are at best flat, and total debt levels go up exponentially.  

One thing that the political-economists have right is that this debt is a real problem.  What they never discuss is a realistic way of easing the cycle.  

There is a very simple solution to easing the debt cycle, which would tend to re-align the economy rather than push it off the rails, while at the same time losing the potential for rampant abuse.  

If the only inflation-fighting tool of the Fed, for example, was to create money and give it in equal amounts to all citizens then this would happen.  Think about it … the over-leveraged would use it to pay back debt with a much smaller crimp to growth, so the system would tend to de-leverage and right itself at less cost.  

The rich who run this country would be very reluctant to use this tool as they would readily understand how it would redistribute assets to the people and push them further from their goals of hoarding everything for themselves – so it wouldn’t be abused.  Today they treat the central banks as a fountain of free money, viewing the huge gains to their own net worth while increasingly blind to the problems of the middle class.  The sad part about the system today is that those in charge are hurting the people they like to think they’re helping, while fermenting their own demise as popular dissatisfaction creates ever larger political tidal waves, and at the same time destroying their own cultures by disrupting local family formation and replacing lost generations with desperate foreigners.
I realize this solution is nearly impossible politically – restricting QE so that it must to go to all citizens equally and curtailing the current method of trickling it though the top – but I’d like to see it at least discussed.

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About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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