The Global Problem: Monetary Policy Can't Fix an Economy's Structural Problems

Of Two Minds ^ | 03/05/2015 | Charles Hugh-Smith

[SeekAndFind]

When we look back from 2025, it will be painfully obvious that central bank policies exacerbated the systemic crises that brought down the global financialization machine.

What with all the praise being heaped on central banks for "saving" the world from economic doomsday in 2008, it's only natural to ask which structural problems their unprecedented policies solved in the past 6 years. After all, "saving" the world from financial collapse was relatively quick work; so what problems beyond imminent implosion did the central banks policies solve in the past 6 years?

Answer: none. zip, zero, nada. The truth is central bank policies of zero-interest rates and free money for financiers have made many structural problems worse.

Did central bank policies resolve the structural problem of unfunded pension and retiree healthcare liabilities? No, they made it worse, as zero-interest rates have reduced the yields on pension funds, 401Ks and IRAs to mere pittances. This destruction of safe yields has driven pension funds into risky investments in junk bonds and stocks, leaving them vulnerable to devastating losses when the current credit bubble bursts.

Did central bank policies resolve the structural problem of corporate wealth buying political influence? No, they made it worse, by encouraging corporations to borrow vast sums to use on whatever they fancied--for example, lobbying and share buybacks.

Did central bank policies resolve the structural problem of rising dependence on credit for weak "growth"? No, they made it worse, as cheap money enabled the re-emergence of subprime loans to marginal borrowers. The deterioration of credit quality guarantees a credit crisis and bubble pop as marginal borrowers default.

Did central bank policies resolve the structural problem of low investment in new assets that boost productivity, enabling widespread advances in wealth? No, they made it worse, as near-zero interest rates for financiers and corporations and limitless liquidity have incentivized debt-based speculation and highly leveraged bets on completely unproductive projects such as share buybacks, which boost the value of corporate insiders' stock options while producing no new goods or services.

Did central bank policies resolve the structural problem of rising wealth/income inequality? No, they made it worse, by boosting the value of assets owned by the super-wealthy .01% and to a lesser degree, the top 5%.

Did central bank policies resolve the structural problem of moral hazard, the separation of financial risk from consequence? No, they made it worse, as monetary policies were designed not to help Main Street but to recapitalize Wall Street banks by diverting tens of billions of dollars that were once paid in interest to depositors straight into the banks' coffers.

Nothing has changed: private banks are free to make risky bets, knowing that if the bets go sour the state or central bank will make good their losses.

Did central bank policies resolve the structural problem of sovereign debt, i.e. central states overborrowing and saddling future generations with crushing debt loads? No, they made it worse, as zero-interest rate policies have enabled central states to borrow gargantuan sums without the interest due on the debt squeezing out other spending.

When credit is nearly free, there's no need to make hard choices or face the costs of systemic corruption, waste, fraud, cronyism and inefficiency; just borrow another trillion dollars, yen, euros or yuan to prop up parasitic elites and vested interests.

When we look back from 2025, it will be painfully obvious that central bank policies exacerbated the systemic crises that brought down the global financialization machine. Extend and pretend only increases the power and amplitude of the crises that will eventually burst forth from the monetary dysfunctions and distortions that are currently praised as financial genius. 

[eyeamok]

I would say that Monetary Policies are the very source of our problems

[Perdogg]

money takes the path of least resistance.

[RayChuang88]

In the end, the best solution is getting rid of a lot of unneeded and/or obsolete regulations and a massive overhaul of taxation to encourage more economic activity.

[SkyPilot]

Here is the money shot right here:

Did central bank policies resolve the structural problem of unfunded pension and retiree healthcare liabilities? No, they made it worse, as zero-interest rates have reduced the yields on pension funds, 401Ks and IRAs to mere pittances. This destruction of safe yields has driven pension funds into risky investments in junk bonds and stocks, leaving them vulnerable to devastating losses when the current credit bubble bursts.

And there you have it - the elephant in the room.

The crash is going to happen, it is just a question of when.

I firmly believe that after the crash, the Federal Government will seize all IRAs, 401Ks, and retirement accounts. So do a lot of other people who are paying attention.

Government Lays Groundwork To Confiscate Your 401k and IRA: “This Is Happening”

Can the US Government Seize Your 401k or IRA?

Obama step closer to seizing retirement accounts

Think about it - Obama has defied the Constitution with ease. Do any of you really think that he will encounter real resistance when he seizes retirement account? He will dovetail your Medicare and any other health insurance, plus Social Security and anything else he can think of, to your acquiescence as the Federal government seizes your accounts.

Obama will need the money for hand outs when the financial crisis hits: EBTs have to keep going or there will be riots, SS Disability checks need to keep flowing, etc, etc.

It's going to happen folks. Count on it.

[nascarnation]

I see some logic in your view.

But one mitigating factor is that a large number of folks like myself are on the verge of having to take required distributions (70.5 yrs old) and pay tax on the money.

[SkyPilot]

The seizure will plug the immediate emergency gap that is going to break through the financial dyke. They have no other option. The Federal government has no other choices out there.

In 2015, the governments net worth is minus $18 Trillion. By some estimations, the amount of money in individual retirement accounts is $6 Trillion.

All they need now is a crisis. And that crisis is coming.

And don't worry. They will still find a way to "tax" you. When they seize your IRAs and 401Ks, they will issue you worthless bonds. They can then tax the bonds! Beautiful, isn't it?

But they won't call it seizure. Expect to hears buzz words like "reform" and "mobilization of accounts."

And they will use the rhetoric they have always used. The "wealthy" retirees have accounts that "generate more than retirees need in retirement." The Obama regime has already used that language.

The "bonds" they will issue will give back people who invested in these accounts pennies on the dollar. And, don't think for a minute the IRS and other agencies don't know exactly how much is in each account, because you have to declare them.

[nascarnation]

Is your thought to withdraw everything now and pay the tax in April 2016?

[SkyPilot]

I am not sure. I would not be so intrusive as to tell an individual on such an important decision. But we all should not be surprised if it happens.

[nascarnation]

I’d pay 14.6% more in tax (39.6 vs 25.0) if I pulled it out all at once vs the minimum mandatory yearly distributions.

It’s a difficult decision.

[ckilmer]

imho the fed has bought the USA time.

That’s very important because ten years from the world is going to look technologically much different than it looks today. this change will benefit the USA’s balance sheets significantly.

That’s what the rising dollar is telling everyone.

http://on.mktw.net/1DZdvTQ