The Fed Broke the Market... Now It Owns It...

PARIS – Not much action in world markets yesterday. The Dow was up 48 points. Almost everything else ended in the red.

Today, another look at the absurdity of central planning. But first…

We visited Athens on Monday and then headed back to Paris, joining an Oxford Club group for dinner at one of the best restaurants in Paris – Le Jules Verne in the Eiffel Tower.

Our Mediterranean cruise last week, aboard the Crystal Serenity, took us to gawk at the great monuments of classical Greek civilization – the Acropolis in Athens, Ephesus in Turkey, the Valley of the Temples in Sicily.

At each spot, we craned our necks, in awe and wonder.

“How did they do that?” we asked ourselves, marveling at the engineering prowess and aesthetic refinement of people so long ago.

A World of Possibility

The Eiffel Tower took our breath away, too.

Here was a monument to a different people, a different technology, and a different civilization – erected thousands of years later.

You look down from the second level – where Le Jules Verne is located – and you wonder: How did they do that?

Still, this is the technology we are familiar with. It is what built the Brooklyn Bridge and formed the Manhattan skyline. It is something we understand.

Assembly lines and mass production… smoke, wheels, and cranes… men with tools in their hands. It has its heroes and its geniuses, too – Ford, Carnegie, Vanderbilt, Sloan…

No technology gets better and better for ever and ever. The Industrial Age probably peaked out in the U.S. in 1970. But it built our world.

It put automobiles on the roads and planes in the air. With its tractors and trucks, it saved as many as 3 billion from poverty… perhaps even from starvation.

And with its tanks and machine guns, it wiped out an estimated 187 million in the mechanized wars of the 20th century – the equivalent of about 1 in 10 people alive in 1913.

The Eiffel Tower – finished in 1889 – showed the world what was possible.

Bad News and Baloney

And now a new technology – of quantum computing, DNA sequencing, 3-D printing, and drones – promises great progress. We wait to see what it produces.

But the Industrial Age – with its high rates of growth and prosperity – flourished in more or less free-market economies.

Now, we have economies that are controlled, manipulated, and regulated by the authorities. Is it this central planning – and not technology – that has slowed growth rates?

We don’t know. But the Fed and other central banks broke the market system. Now, they own it.

Last week, investors were cheered by bad news and baloney.

The bad news showed the world economy slowing down even more than expected – to the lowest levels since 2009. This led IMF chief Christine Lagarde to urge central banks to hold off on any interest rate increases.

It was like asking an obese person to put off dieting: The plea met no resistance.

From every direction, central bankers are being urged to do even more absurd and reckless things.

In Greece, to which we just bade farewell, the feds there are considering tighter controls on cash.

According to one report, civil servants and pensioners will be restricted to taking just €600 ($683) a month in cash. The rest will have to be spent via debit or credit card.

If implemented, it will affect 2.65 million retirees and 600,000 government employees. Then it can be rolled out to the entire country…

This is a way for government to crack down on tax evasion and the black market. More important, it is a way for government to further control the economy and the people in it.

Rise of the Technocrats

Back in the U.S., Harvard economics professor Kenneth Rogoff has lost his mind.

Writing in the Financial Times, he notes that the world economy is slowing – a “hangover, not a coma.” This is caused by what he calls “the later stages of a debt ‘super cycle.’”

So far, so good. Credit expanded by roughly 50 times between 1964 and 2007. It’s time for it to contract.

That is bound to be deflationary… and to cause a slowdown.

But then poor Ken imagines two absurdities at once…

First, that government spending on infrastructure will successfully counteract the debt super-cycle…

Second, that an elite corps of government employees can figure out how to spend the money wisely (presumably getting a higher rate of return than the private sector). Rogoff:

President Barack Obama once proposed creating an infrastructure bank, which would employ technocrats to provide objective analysis. It was a very good idea.

If advanced economies are to continue expanding the size of government expenditures (now 57% of output in France), it is imperative to find better ways to make choices and decisions. Policy action is needed, but of the right kind – and in response to the right diagnosis.

And if technocrats could make better decisions about what to do with the world’s resources than the people who created them, the Soviet Union would still be in business.If government spending on infrastructure – financed with money that never before existed – could help make people wealthy, the world would have a lot more wealthy people than it has today.

More to come…


Bill Bonner
for The Daily Reckoning

Originally posted at Bill Bonner’s Diary, right here.

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