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Role and Responsibility of World’s Central Banks and Governments

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Role and Responsibility of World's Central Banks and Governments

The world's governments and Central Bankers tend often to ignore the fact that they cannot create real growth by playing with monetary policies alone. We can measure the real growth by (1) the number of people with a full-time job and (2) the rate of productivity. They both require structural reforms to improve the economy, not only monetary policies.

The productivity rate is linked to theory of “system concept.” Mr. Edward Deming, an American citizen, Nobel laureate and father of so-called “Continuous and Never Ending Improvement” developed the idea. With this concept, he taught the Japanese how to grow their economy in the 1950s just after the World War II. In the context of this chapter, the practical interpretation of Mr. Deming's work is summarized in a few sentences: any production system has a certain efficiency or productivity rate. This rate depends more on the rules, regulations, processes, as well as internal and external communications of the system than on people who run the system. As a corollary, an excellent system run by “normal” people would have a much higher productivity rate than a poor system, run by excellent and high profile academics.

In defense of governments and central bankers, we could say that these leaders work within the framework of a certain system with its own specific operating rules, regulations, processes, and internal and external rules of relationships and communications. These are the legacy of many dozen years or sometimes, even centuries. The system’s inherent inefficiencies cannot always be improved without a certain level of shakeup. This is because certain enhancements could go against interest of some influential people or community who have been controlling and shaping the system for years, often by defending their own personal interests.

A prominent characteristic of central bankers and politicians behavior consists of reacting to the events, as oppose to pro-acting. They are behind the curve and their actions lag the market trends significantly.

The main purpose of this book is to explain the strategies that enable traders to determine the market future trends in a timely manner, and take pro-active actions accordingly. The past actions of central bankers and governments reveal that they do not know, which wave the market is in, which direction it is taking, how far it is going, and for how long. Actually, many of influential leaders of the US economy, politics, finances, and industries failed to predict the previous financial crisis of 2008. This includes leaders of central banks, Bearn Sterns, Lehmann Brothers, Citigroup, Bank of America, General Motors, AIG, and many more. As a result, they have not only brought losses to their company, employees, and shareholders, but also to the US taxpayers.

In terms of Money Printing Strategy, the governments and central banks leaders exhibit the very same "herding behavior" of trading-and-investing crowd. This is why they react emotionally to events and take temporary measures to resolve often the symptoms and effects, but not the root cause of problems. Furthermore, they often ignore the longer-term consequences of their short-term decisions and actions.

Below you will find a few arguments as to what precisely goes wrong and more importantly, what the cures could be.

The real cause of current economic and financial weaknesses seems to be the following factors:
  1.  Addiction of Reaction as Oppose to Pro-action
The impending crisis is in front of the door. The wave E could most likely start in a few months after decision by the Fed to hike the interest rates a few times. For this impending market crash, it is already too late. The advent of subwave E cannot be avoided. It can only be delayed by manipulative actions of politicians and central bankers, but with the cost of a more sever crash thereafter. To avoid future crisis, the governments and the central bankers may wish to switch from the customary addiction of reacting to market fluctuations, in favor of proactive intervention. This requires them to improve drastically their ability to forecast market trends in real-time and to initiate appropriate actions in a timely manner. Whether the government's structure allows such giant change of mentality and behavior, depends on countries. With the right preventive measures, governments can reduce the probability and severity rates of future market crises drastically.

The best politicians and central bankers could do at any time would be to refrain from intervening and manipulating financial markets and to let natural forces of free markets adjust the anomalies by themselves.
  1.  Fiat Monetary System
Introduction of fiat monetary system provides politicians and central bankers the power to print an unlimited amount of paper money at will. The printed money is then spent to bail out inefficient companies but also to keep alive inefficient government institutions. The result is the ever-increasing inflation and loss of currency's buying power. Establishment of fiat monetary system reduces drastically the government's accountability and increases its opacity and inefficiencies.

Again, President Hoover was right to say “We have gold because we cannot trust the governments.” Furthermore, removal of built-in institutional inefficiencies should be one of main duties of governments to prevent public services grow to giant and over-dimensioned bureaucratic monsters, fed with taxpayers' money. 

One objective of forthcoming wave E is to force governments to replace the fiat monetary system by a currency backed by gold again. It may also lead to smaller governments and less bureaucratic administrations.
  1.  Golden Rule
The golden rule should become an article of countries' constitution. In times of peace, governments should be prohibited to propose budget deficits to the parliaments. Likewise, Parliaments should be forbidden to approve any proposed budget deficits by governments. Any household must run a sound balance sheet. Why should governments be an exception to the rule?
  1.  Bailout of Private Companies
Private companies, big or small, should themselves become responsible for gains and losses of their businesses. The law should strictly prohibit governments to bail out private companies with taxpayer’s money. The reason is that company leaders would behave differently and take different decisions and actions if they were to know that all risks would ultimately be for them. If they think that all rewards would be for them, but all risks transferred to government and taxpayers, why should they bother running companies efficiently?

Regardless, such interventions create potential conflicts of interests, corruption, fundraising and lobbying for politicians. In turn, this would lead to ever-weakening democratic systems until citizens lose trust in integrity of government bodies and institutions. Associated risks could then result in unpredictable major political and social unrest.

Policy of bailing out the “too big to fail” private companies transferred a substantial amount of taxpayers money toward those companies. At the same time, it pushed the federal government to the edge of bankruptcy because of accumulated Federal debt.
  1.  Treasury Securities
The constitution shall prohibit Central Bankers to purchase, own, or store any Treasury Securities of governments, directly or indirectly. This should be the rule whether central banks are dependent or independent of governments. This way, potential conflict of interest among politicians, central bankers, lobbyists could be avoided.

You may wish to read the section "Conclusion" of this chapter later on for a global overview of US state of economy and finances in early 2015, where it should go, and what you should do to prosper.
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