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Central Banks

Central Banks --- the so-called custodian of a Nation’s wealth. If not. Why not! When one contemplates the turmoil roiling international stock markets; the bursting bubbles of both the “sub-prime mortgages” and “the asset-backed commercial paper” --- which in the end is proving not to be so “asset-backed” as the World was led to believe --- we ponder and worry. Perhaps the answer to all this, would be that it is either not the function of Central Banks to enact law, or for that matter to “police” and/or advise Government to enact the appropriate laws to protect the Nation’s wealth.

The point we are trying to make, is that Central Banks SHOULD HAVE THE FUNCTION AND THE POWER TO GUARD A NATION'S WEALTH. To be the custodian of the value of the currency --- and to be the prime arbiter of “debt creation.”

Governments come and go. They are from time-to-time either “to the left” --- “to the right” --- central” --- or for that matter, all shades in- between, of he so-called “political spectrum.” They suffer the pressures of powerful lobby groups. And in the end are politically beholden to the “political philosophy of their “party” and its voting supporters for their jobs and “public image.” Essentially they are the least capable of protecting National Wealth; for they either over-tax, under-tax or squander derived taxes to the extent of massive debt creation and the consequent diminution of the value of the currency. 

At this point one has to digress for a moment in time to once again examine the term  “MARKET FORCES.” Specifically, or perhaps in broader terms it can be defined as THE LAW OF SUPPLY AND DEMAND. Unfortunately this “law” is corrupted by additional factors, such as the manipulation of hedge funds and/or the collaboration of suppliers in either slowing down or withholding the “supply-side” of the equation. From time-to-time the “demand” side is adversely affected by excessive “hype” and media distortion. A good example of the one, is OPEC with crude oil supplies, while another is that of two well-known brothers in the United States of America, in collaboration with a Middle Eastern Oil billionaire attempting to “corner “ the supply of Silver some years ago. In essence, one cannot and SHOULD NOT allow this so-called law of supply and demand to rule the economic fate of the World, without both constraints imposed thereon, and an independent body in place, empowered to supervise its use and functions.

By and large Central Banks play too small and too weak a role in National economies, as they do too --- when it comes to “Global Over-site” in keeping the global economic structure “: ticking over” with as little disruption and turmoil as possible. In other words stronger and better defined Central Bank function with unfettered independent powers to oversee National economies: And finally A WORLD BANK of Central Bankers whose primary function it should be to oversee stable world economic well-being. In other words --- not being a “Toothless Tiger” as they are presently. This body to consist of the12 Chairmen of the world’s most powerful Central Banks economies. Not wanting to be confused with the present “World Bank”, it is suggested that it be named “Global Central Bank” or (Global Central Bank Committee.)

The functions of the World Bank and the International Monetary Fund are pretty well defined, and it is not suggested that any of those functions be usurped. The same sentiments could also possibly apply as well to “the Bank for International Settlements. Having said that, to some extent they all at times contribute to world economic instability, and specifically this comment would apply to the IMF in their enforcement of exchange rate changes forced upon the currencies of countries applying for further loans or debt relief. Then again, we also have the “G 7or8” and the “G 20” – so why the need for another World Body? The problem with those last two --- is that “All they ever do – is TALK --- and no action is ever undertaken! The Global Central BANK WOULD ESSENTIALLY CONCERN ITSELF WITH global economic issues and policy. However it must have the power to function, as does The World Trade Organization. To define and make laws --- and the power to punish transgressors. At a later stage we shall offer suggestions as to some of the functions that should reside in their hands after we have dealt with what is lacking in the functions of “domestic” Central Banks.”

Putting aside the gathering of economic data, its dissection and constant meetings to determine or define what effect this data is having on the local economy, its end result seems to always be to --- either lower interest rates --- heighten interest rates – or leave them as they are. One is left with the impression that ALL THAT CONCERNS CENTRAL BANKS --- IS INTEREST RATES! To use interest rates to either stimulate the economy or dampen or slow its growth. As a tool for inflation or recession. While interest rates are important, a well-run economy determines its own benchmarks as to where interest rates should reside.

Before one can enumerate what Central Bankers should be responsible for, let us examine all the things that went wrong with domestic economies world-wide There is an expression or phrase in economics which says --- “the velocity of money.” The speed within which money circulates within an economy; the faster it is spent the greater the economic growth. However it is not MONEY, which has become the basic factor in economic growth – BUT DEBT that has today replaced the function of MONEY. Mountains of debt created with the velocity that had it been money would have rescued all those “third world” countries from poverty.

Uncontrolled debt creation --- and worse still, not backed by tangible assets. In actual fact, or should one say “in essence, a lot of this debt” has in reality been backed by other debt. The main culprit for this uncontrolled debt creation was the dramatic drop in interest rates worldwide created specifically by Central Bankers. A zero rate in Japan, and a 1% rate in the USA were the prime culprits in this regard. All other major Central Bankers followed these two. The creation of this “carry trade” by Japan without any safeguards in place to control its volume or purpose has created a global nightmare of debt creation, coupled to unrealistic valuations of stocks, bonds and real estate. Coupled to all this is an underlying factor of inflation. In the case of the United States, the massive creation of so-called “cheap money” was or is in reality the creation of “cheap” debt. For today, nobody seems to ever “pay cash” anymore for their purchases; some sort of debt instrument concludes it. In fact, one could come to the conclusion that it is today “IOU’s” being printed at the worlds treasuries, instead of banknotes.

Coupled to all, or as a result thereof, were the massive sales of what is now called “sub prime mortgages.” There is little doubt that that criminal activity became largely involved within the mortgage lending system, and as the frenetic demand for more “capital creation” was required to sustain this frenzy, so-called asset backed paper was created to generate these capital flows. As domestic sources of cash slowed, it resulted in so-called asset-backed paper being bundled in various disguises and sold off globally. In consequence to this scenario, we now have the present global turbulence and ill liquidity.

We doubt that the full extent of the losses incurred by the meltdown of the sub-prime mortgages and bank and non-bank sales of bundled commercial paper will EVER be known. It could take a decade or more for these losses to be “realized” or fully absorbed. The massive sell-off of bonds and stocks is a reflection of what is taking place as Institutions scramble to maintain liquidity. Had Reserve Banks done their job properly and come to the rescue in a timely and forceful manner, very little of this debacle would have occurred. As a result now, it is the small investor left “licking their wounds” – and “hung out to dry” to the tune of perhaps “trillions of dollars.”

The point we are trying to make is that Central Bankers, and they alone, are responsible for this present debt turmoil and nightmare engulfing the world presently. If you want to “play with interest rates”, surely there should be limitations and safeguards in place to control the consequent debt creation. It is all very well to make a remark about “over exuberance” when commenting on the frenzied stock market activity and consequent over-valuation of stock prices, when the person who said that was the prime creator of the cheap money creating this havoc.

Let us for a moment discuss the word “inflation.” The dictionary defines it in part as  “to exceed normal or just value.” And “specifically to over issue currency.” As well “increase in price levels arising from mounting effective demand without corresponding increase in commodity supply.” One would think that these explanations would be concise enough, yet nothing is said about THE PURCHASING POWER OF THE CURRENCY! Surely the reality of the matter is that, --- to a large extent the value of the currency has declined due to the debt load placed thereon. In other words, to use an American expression, “The Greenback is loaded with debt.” The dollar is not worth a dollar anymore! The massive additional debt load created by both budget and trade deficit debt financing bolsters this concept.

If we take this thought a stage further, this is in reality what has been taking place. From the year 2001 through to November of year 2007 when this article is being written, there has not been A SINGLE METAL OR COMMODITY IN SHORT SUPPLY --- the prices of ALL of them have skyrocketed. While the cost of manufacture and/or mining may have risen over this period, they are but a small percentage of the price increases. It is only in the agricultural sector that the so-called “supply and demand” factor can apply, due to the vagaries of climate and weather affecting supply. For all else, it is mainly due to the diminished value of the dollar and consequent cross values of all other currencies that have caused massive price changes. In reality --- it is a reflection of the diminished value of the US dollar that has occurred, and that decrease in value can ONLY BE the debt that is attached to every single banknote!

The above statement brings us to the realization of the folly of utilizing a Domestic Currency to be the pricing factor for international trade in goods and services.

We have mentioned in several of our other articles the desirability of having a separate defined currency to which ALL OTHER CURRENCIES shall have a defined value, to be adjusted from time –to-time as it is found to be needed. We suggested at the time, that it be called a UNIDOL (short for “universal dollar.”) This was advocated over seven or eight years ago, and we now feel that it is imperative that something is done about it now, before the whole fabric of international trade, currencies and global economics starts to unravel.

This will again be dealt with when discussing the functions of the “Global Central Bank.

Getting back to domestic Central Bankers and inflation and their use of interest rates and consequent debt creation, we have to examine all the other factors that were influenced either by their manipulation of interest rates and/or the things that were not done in order to safeguard the economy, having decided “to play with interest rates.” We are going to advocate a number of safeguards, and a number of perhaps revolutionary economic scenarios not presently practiced by Central banks in their quest to create equilibrium within their domestic economies. The underlying “economic philosophy” being to guard the value and purchasing power of the currency and at the same time safeguarding the well-being of the economy.

So let us start with the domestic banking system. Banks derive their working capital from two sources. The issue of shares to the public and the issue of bonds both domestically and internationally. To this one has to also add the accumulation of wealth through the retention of part of the profits earned. The issue of internationally placed bonds incurs the debt in the currency of the country within which the bond was floated, thus incurring exposure to a variety of foreign currencies. A major currency exposure also occurs on a daily and hourly basis with those banks that choose “to play “the world’s currency markets.” One can understand the need to purchase foreign currency to cover the payment of foreign trade debt or travel requirement, or for Reserve Bank monetary reserves ---- but certainly NOT FOR SPECULATIVE PURPOSE. We would thus advocate the “outlawing” of currency speculation by banks worldwide. This law or rule would equally apply to “private” currency speculators. In other words, the Reserve Banks would be the buyer and sellers of foreign currencies to banks, businesses and private individuals through registered currency exchange retailers. Thus, to a large extent violent swings in cross currency values will have been eliminated. This does not hinder the free flow of private funds seeking” safe-haven” in a currency other than the one in the country they reside in. Individuals would still be entitled to place their savings or investments in any foreign bank they choose to place it in, or to invest in foreign stock markets in that market’s currency. It could as well perhaps, put an end to “money laundering.” However, full oversight would be in the hands of Reserve Banks. It is not that long ago that ONE “billionaire” individual in the UNITED STATES “took a run” at the British pound and forced the Bank of England to devalue the pound. They were powerless to stop the attack on their currency BY ONE INDIVIDUAL SPECULATOR! The same thing is today the case with the global debt turmoil where Central Banks have nothing “in place” to counteract its effect on debt and currency flows. The World Bank and the IMF would thus obtain their foreign currency requirements as well from the Central Banks of contributing nations.

Far greater oversight is needed by Central Banks over the retail banking system. Branches should be required to be set up in all “provinces” or “states” to oversee the retail banks and as well the quasi-bank financial companies who daily manipulate Billions of worth of their respective currencies. Stated rules and regulations should be enacted to control both debt and investment risk management and to see that these rules are being adhered to. This applies as well to stock markets, as the present over-site of stock markets is woefully short of what is needed to be done. Hedge Fund operations under little or no constraints. “Mergers and Take-over” done with little or no cash changing hands, but accomplished with Billions of “dollars” ranging in size of 10/20/30/40 Billion, without any concern as to the massive debt load being created over and above their existing debt. Retail bank lodgement of funds into the Reserves of the Reserve Bank are far short of what is a required retention and has over the years been diminished from what was required 50 years ago. These should be brought back to where they were originally and the percentage of net asset value should be globally the same ratio. The biggest mistake that Central Banks have made worldwide is their belated attempts to “rescue” banks and institutions from their folly of sub-prime mortgage lending and commercial paper debt. Too little  --- and too late!

Putting aside the fact that there was no over-site or controls in place while this was unfolding over years, the fact is that Central Banks SHOULD HAVE BEEN the logical source of UNLIMITED capital requirement to stave off and rescue the situation. The time to chastise and punish those responsible could have been tackled at a later stage. Having stated this, it is still NOW (November 21^st.) of dire necessity for Central Banks to start to augment a global rescue operation before this massive debt creation engulfs all economies! If this is not under taken, then surely we are headed for a global recession of horrendous size within the next six to nine months.

If Central Banks are to be the custodian of a nation’s wealth, and the guardian of the currency’s purchasing power, then it has to have the monetary means with which this is to be accomplished. In other words it has to have vast reserves and the full power to utilize those reserves. It is not for us to define how this is to be accomplished, as it would require a new “Breton Woods” to define and organize this as, it also needed to re-examine a possible creation of an independent world trading currency BACKED BY GOLD or other tangible assets. This new “meeting of the minds” of the World’s top economists is imperative now. They would as well undertake a new system to define cross currency values to an independent trading currency.

Unfortunately “Breton Woods” has been corrupted and sidestepped over time, and is now incapable of coping with “Globalization” and the massive flows of currencies and Global Debt.

So, getting back to the Central Banks functions. As custodians of the Nation’s Wealth, The Bank should be responsible for the issuance of all Government, Provincial (State) or Municipal debt instruments. Where those entities previously issued bonds either locally or globally, this would be done by the Central Bank. In other words, the money would be “borrowed” from the Central Bank --- and interest and capital repayment made back to the Bank via tax revenues collected by those respective bodies. This has several advantages, as the “reason” for which these funds are required can be examined and policed so as to identify the expenditure and at the same time to control the quantity of debt creation in relation to income  -- as an established percentage. Similar factors would be required for any bond issues outside these parameters, to ensure that a standard basis of bona fide assets exist to cover the debt incurred --- as a given percentage of net asset value. In this way, the Central Bank would have control over the stock markets and the public companies that use their services. Instead of banks issuing bonds, they would apply to the Central Bank for funds and repay these monies with interest at a stated interest rate cost over a stated repayment time. The Reserve Bank, in turn would float either domestic bonds to “suck up” excess local liquidity, or if it felt that the local economy needed this liquidity, they would float these bonds overseas.

We are not going to go any further in defining anymore “specifics” within which Central Banks should control or be involved in. The basic crux of the matter --- is that the economic well being of domestic economies be taken out of the realm of domestic politics, and placed in the hands of economists, both of theoretical and practical experience; irrespective of where their political affiliations reside. It is far more important than “party politics or party political philosophies!

Finance Ministers should confine themselves to dealing with taxation and budgets and leave the overall strength of the economy and that of the country’s currency in the hands of the Central Bank. The lowering of taxes should never be used as an instrument to generate consumer growth or to combat rising inflation. One lowers taxes to: "right” previous mistakes of over-taxation or to balance unfair anomalies of the tax system. If Governments refuse to give Central Banks the required authority to control all that we have suggested, then at its least, let the Central Bank have the power to demand of Government the enactment of the laws and rules needed to guard the value of the currency and the strength of the economy.

We end this article with a discussion on the functions required to be undertaken by a Global Central Bank committee. While Central Bankers have been meeting on a regular basis over the years, little if anything seems to have been accomplished. Perhaps it is because everything is said and done “by consensus” instead of enactment ‘by force of law” or majority opinion. The Committee has to have fixed rules and regulations and a fixed International economic policy. This can only stem from another “Breton Woods” where its rules, laws and functions can be defined. It has to have the powers of a type similar to that of the World Trade Organization. Its primary function would be to oversee World economic growth and stability. The cross-reference values of currencies should also be its task, coupled to perhaps an independent world trading currency ---other than the American dollar. It should either have Currency Reserves of its own ( of the new trading currency), to be utilized to stabilize world liquidity as and when required., or the formula and the power to demand fixed contributions from all countries based on a formula of their domestic economic strength.

Finally, we offer this formula for consideration, relating to defining cross-reference values to currencies. Value each currency on the basis of the average value of its economy’s annual GDP output over 5 years, add the value of its monetary reserves, and equate it “percentage wise” to its total debt --- both domestic and foreign. The result thereof to be “a factor” expressed to the new International currency. Thus a currency would be expressed as say “2 to the Unidollar” or “3” or ‘4” etc. The same formula to be applied to all other currencies. If this currency is to be backed by Gold, we suggest that it either it be say "10 Unidollars” would buy 1 gram of gold or ALL domestic currencies have to be backed by an IDENTICAL percentage of gold. Domestic currency values to the International Currency to be revised every two years, or sooner if an emergency arises. We hope as well that for those that come upon this article, it has given you --- FOOD FOR THOUGHT.

The identical addendum will appear at the end of six articles out of the twenty-eight articles that comprise this website. The problem with websites of the kind written by the author is that most of what has either been forecast to take place --- has done so, or have not “come to pass.” Or even may never being destined to do so. Whether there was or is merit in what was either forecast or advocated should happen, is perhaps now not “material” to the issue, other than they either be deleted or rewritten or revised from time-to time. As this website is destined to implode in August of the year 2010, an addendum to the six chosen may have to suffice.