Central banks: the good, the bad and the (very) ugly

It is increasingly clear that the Fed and any other central bank pose a danger to future financial stability, with its policies increasingly linked to markets and not to the real economy.

Part of the history cycle is the emergence of various industries, their growth, maturity and decline. However, throughout all these years of natural economic selection there has always been a piece in the puzzle that appears to play chess while the others were concerned with playing checkers, guaranteeing their constant importance and influence: financial institutions.

The financial system works on the basis of the trust attributed to us by all of us. This confidence in ensuring that the nominal value is the real. When this fragile trust is broken, bank runs,  whose solution was the creation of central banks, one of the most influential today. These institutions would serve as a support line for member banks when they were experiencing liquidity crises, that is, they would be the 'bank of banks'. The greatest danger of this system will be the fact that monetary control has been given solely and exclusively to non-governmental institutions.

However, since 1971, the guarantees that served as pillars of that trust ended when the gold standard it was abandoned making any currency with no defined collateral real value, opening wings to the largest financial market today, currency exchange.

The central objective of central banks is to maintain an annual inflation level close to 2%. This has the effect of maintaining a stable and healthy economy. But is it something to be feared? The answer is yes, if it reaches such a level of lack of control that it leads to the devaluation of any currency. Historically, this has only happened in desperate attempts at economic recovery from unprecedented fiscal stimulus by governments, in periods of prolonged instability. Sound familiar?

About 25% of all dollar currency circulation was created in 2020. All these efforts to quickly recover the general price levels (CPI index) and pre-pandemic consumption levels, otherwise many companies, mostly small and medium, would open insolvency causing a feedback loop economic downturn.

The speed with which money is transacted is decreasing even with the measures taken, suggesting that they have been little or not effective. Therefore, it is expected to observe some adverse effects such as inflation through costs, whose control is crucial for a healthy economic recovery and for the smooth functioning of the markets.

This leads to question the effectiveness of measures and financial instruments imposed by central banks, in an attempt to boost the economy and pursue a utopia (obtaining and maintaining 2% annual inflation in a given economy), see the case of Japan. it is clearer that the US Federal Reserve and any other central bank pose a danger to future financial stability, with its policies increasingly linked to markets and not to the real economy. An asset bubble is being fed and the economic reality is distorted.

A single unfavorable event showed what this bubble is really made of: individual people living above their means without savings or plan B. Mainly, over-indebted companies and leveraged economies. Did we checkmate our future?

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