By Vern Gowdie – The Gowdie Letter (Australia) –
‘Since the central bank can print as much as it needs to, there is no limit so you can stop any crisis cold merely by just buying up everything.’
Dr Alan Greenspan
Greenspan’s frank admission on the lengths central bankers could go to if ‘push comes to shove’ has occupied my thoughts in recent times.
Would they really do that?
Well, during our exclusive interview in Baltimore two weeks ago, Greenspan did say, ‘What there is a tendency to do, and this is true of all human decision-making process, is you’ll go for that which gives you the least risk.’
We know central bankers are not blessed with spines of steel. Tough decisions are something they avoid at all costs.
When the imbalances in the system start to auto-correct — like they did in 2008 — central bankers opt for the easier options of printing money, buying up assets and making the cost of debt as cheap as possible…reward the reckless banks, reflate the asset bubble and punish savers.
Therefore, it’s highly probable the response to the next (and I think, far more severe) crisis could be a stimulus effort without peer. And that’s saying something.
However, Greenspan did acknowledge the risk in buying up everything:
‘The trouble is, what do you do then? If there is that sort of action taken several times, you engender a degree of uncertainty in the marketplace, which essentially destroys the viability of the structure.’
I suspect the central bankers have commissioned a report on the effectiveness of the post-GFC stimulus. Hopefully the report concluded that, on balance, it does more harm than good. That it punishes savers and retirees, rewards zombie corporations, encourages more risk taking, distorts asset values and allows politicians to continue making unfunded promises.
The stimulus efforts are masking agents. They’re ineffective in addressing the underlying structural problems of too much debt, too much capacity and too many boomers moving into the lower consumption phase of their lives.
In fact, they’ve made a bad situation worse.
No matter how critical the report might be, their response would be, ‘What else could we do? Let the system collapse and rebuild?’
Even though they may privately agree that stimulus measures do not address the real problems, publicly they’ll do whatever it takes. There is no way they can sit idly by and allow the markets to mete out the punishment needed to correct decades of debt excess. The results would be brutal and lead to social upheaval.