The Inevitable Failure of Mechanistic Monetary Policy

Friday, April 3, 2015
By Paul Martin

by Charles Hugh-Smith

Our current faith in central banks’ ability to “make the economy all better, all the time” is horrendously misplaced.

We are living in the Cargo Cult Era of Central Bankers. The era began in earnest on December 5, 1996, when Federal Reserve chairman Alan Greenspan cautiously wondered aloud if the stock market was exhibiting “irrational exuberance.”

The stock market promptly tanked. In this era, the utterances of central bankers exert more influence over markets than fundamentals.

This simplistic faith in the Cargo Cult magic of central banks is based on the absurd notion that two levers–interest rates and buying debt–can control and guide an immensely complex economy. Central bankers are well-versed in arcane incantations such as Operation Twist and aggregate demand, but if we strip away the mumbo-jumbo we find only two levers: interest rates and the purchase of debt.

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