Who Needs a Central Bank?

“Recovery is here!” the Pollyannas shout. “This is the first sign. And soon all nations will be following with their rate increases.”

They talking, of course, about the Australians decision to hike their central bank index rate. And instantly the howls of recovery were on the lips of all the pundits.

But the recovery at large is still not on the horizon.

We may be facing a serious battle with deflation, and that the evidence is all around us, Australia notwithstanding. And now we have seen more than just anecdotal evidence.

A few days ago, the United Kingdom, which has been struggling with a weakening currency, released inflation numbers far below expectations. Not only was inflation lower than expected; the figures were actually negative.

What does that mean? Well, when inflation numbers turn negative, that is deflation. And England wasn’t alone.

The number one economy in the Eurozone, Germany, released numbers that said the same thing. Prices are not increasing, they are decreasing… and at a surprising rate!

That’s contrary to conventional wisdom, which says that the bloated money supply should be raising prices. But as I explained last week, that money supply isn’t natural — it’s being created on a whim by the central back and being pushed into its member banks.

From there, it is being held against the mountain of derivative losses, bad loans and investments, instead of flowing into the economy at large through lending.

That lack of lending is what’s preventing inflation. It won’t show up until the money is released to the public. Until then, the money supply has not effectively changed or expanded… and we’ll continue to see deflation.

Deflation, in turn, will lead to longer periods of extended “non-growth” and lower interest rates — at least in the places where they can be lowered. Where they cannot be lowered, “stimulus ad nauseam” will remain the protocol of the day.

But, of course, a flat-broke country can’t stimulate unless it can borrow. We are not like China with $2 trillion in reserves. Staying afloat requires borrowing unparalleled in history. The problem is, now that we aren’t buying the world’s widgets, the world is far less inclined to loan us anything. After all, that’s the way the game has been played. They lend to us — we buy from them. And everybody was happy. But you just can’t borrow forever.

So if deflation is going to be the name of the game, what happens to the currency markets?

Thomas Jefferson Fears the Federal Reserve

To answer that question, first we need to determine which currencies are going to move in which direction. That will continue to unfold over time. But it will likely lead to the currencies of the West doing a slow gyrating dance. Neither currency is better than any of the others, so they will just move back and forth until one of them gets their debt and banking situation under control.

Very possibly, the first nation to get rid of its central bank will be the first to really break out.

Because as we all should be well aware by now, central banks exist for one purpose and one purpose only: to bailout their banker buddies who, in the pursuit of greater profit, have made risky loans… to bail out large industries in order to preserve the job base… and to make sure that the taxpayers foot the bill. They will masquerade it in the best of terms, but at the end of the day, we are paying for their foolish business practices.

The sooner we do away with a central bank, the richer we all will be. This is not our first experiment with a central bank in the United States, but it has been our most costly. Our forefathers vehemently opposed the idea of a central bank for just this reason.

They believed that such a cartel would rape and pillage the public and increase poverty on a massive scale, until there is nothing left to take.

“I believe that banking institutions are more dangerous to our liberties than standing armies,” Thomas Jefferson wrote. “The issuing power of money should be taken away from the banks and restored to the people to whom it properly belongs. The modern theory of the perpetuation of debt has drenched the earth with blood and crushed its inhabitants under burdens ever accumulating.”

Amazing, isn’t it? Here’s a man who, two centuries ago, understood why central banks brought themselves into existence. The Federal Reserve in the United States has done nothing to improve our lot and has done everything it can to extort our wealth by the tax of inflation, then to export it to economies and dictators who live like massive welfare recipients off of the taxes your fathers have paid, and you continue to pay, and your children will have to pay.

And it will remain like this until the Fed is abolished again. As I mentioned, the population of the United States has closed more than one central bank. Former presidential hopefuls even lost their bids to the White House over their stand in favor of a central bank. Until such a day as we are sufficiently educated again to see them as a menace to our wealth and way of life, until we take it in hand to dismantle the Fed as it is, we will continue to suffer the expropriation of our hard-earned money to those who act as our overlords.

Problem is, I seriously doubt that will happen within our lifetimes. Look how long it’s taken us just to consider a bill that audits the Fed.

In the meantime, I recommend you take your capital to the place it’s treated best.

That specific place, however, is yet to be determined. Will it be Australia — the first ones to hike rates? Will be China – the almighty ones holding a financial nuclear option?

I can’t say for sure.

But I can say that, over the long run, it won’t be the greenback.

If you’re looking for a way out, diversifying your savings into another currency through the FOREX markets is an easy way to do it.

Bill Jenkins

October 15, 2009

The Daily Reckoning