Fed Will Blink

Fed Will Blink by Bill Bonner – International Man

Editor’s Note: Bill Bonner, Doug Casey’s longtime friend and colleague, has been studying financial systems for decades. Today, he explains a dangerous setup that could soon prove fatal for the world economy…


There was a time when central banking was an honest profession.

Central bankers provided financing for the government. They backed the banking system, too, by holding savings as reserves, which they lent to solvent member banks in emergencies.

They were tight-lipped, tight-laced, and tightwads. Their role was to say “no” more often than “yes.”

When the king wanted money to fight in a war… or build a bridge… the banker would give the terse reply: “Sire, we don’t have any.”

Real money was backed by gold. And credit had to be backed by real money, which meant it had to be saved. Savings were limited, as was money.

Savings backed 100% of U.S. credit needs until about 1973… two years after President Nixon first announced that the dollar would no longer be backed by gold.

Then, almost unnoticed, a new financial system took over… with new central bankers in control of it.

Forty-five years later, America saves scarcely 20% as much as it issues in new credit.

The other 80% is “funny money” – credit created out of nowhere by the Fed, by banks, and by foreign central banks (mostly recycling trade surpluses).

Doomsday Bug

Haruhiko Kuroda, governor of the Bank of Japan, says he’s going to put out a lot more of this funny money. Bloomberg:

The Bank of Japan will continue with very accommodative monetary policy and maintain the current pace of asset purchases for some time, Governor Haruhiko Kuroda said in an interview.

While Japan’s economy is doing better than thought a few months ago, the inflation rate is still quite sluggish, Kuroda said in New York on Thursday.

“The target is 2%,” said Kuroda of the rate at which the BOJ hopes to destroy its own currency. “We’re still around 0%. So it’s a long way to go,” he said.

The Bank of Japan already owns 40% of outstanding Japanese government debt. It apparently sees no barrier to buying all of it ­– financing Japan’s deficits with make-believe money.

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