The central bank, central banks, have given up control of monetary policy to investment institutions. I say central banks because the Japanese central bank is famous for bowing to pressure from politicians, and the Chinese central bank is undoubtedly under the control of the party. Mr. Bernanke's little tenure in the White House prior to his installment at the Fed did little to reassure concerning his independence, and now he his working hand in hand with the New Dems Wall Street boys. Put Japan and China with the Fed and you have the bulk of the global economy, I didn't say anything about Europe, we will give them a ride here.
They've given up monetray policy? That IS a big thing to say, yeah really, it is. Not just now but historically, that was such a trump card, such a power card for them, oh God, you know it.
So what happens in the real world? Your local bank extends a loan, car loan, mortgage, whatever, they expect to make money on that loan, they do make money on that loan otherwise they wouldn't be in business. When they make that money it represents a draw on the amount of currency in the economy. Central banks have to fill in that draw or else they allow the cost of capital, the cost of loans to go up. Because while they are doing it so is the competing bank across the street. If they make it so there is less money the cost of that money goes up. So the Fed accommodates them It puts the money out there.
And sure the same thing happens when business compete, they all expect to make a profit at the same time. But in the business world it is o.k. if they don't, for that competition to draw on the available money supply to actually put people out of business if the money supply wont grow, but people get a little worked up when banks fail, or investment funds tank.
Now the econo heads will blather that this is simple economics. Money supply, controlling inflation, stimulating growth, that whole little dance...Fair enough...
If the Fed doesn't want to slow the economy it can't let the money supply shrink, the cost of capital to expand. It must accommodate the banks.
This is VERY important, folks.
Because we aren't just talking about your local bank and that car loan, we are talking about hedge funds, the commodities markets, derivatives, mutual funds, etc. The investment community which hadleveraged it's way into leading the central banks around like a steer with a ring in it's nose.
Someone I trust told me that that wages now represent less than half of national income. I've seen enough of the numbers to believe that without checking For the Fed to put the brakes on this exponential growth in the drawing power on hard currency would mean putting the brakes on a major player in the creating of global economic growth, even in this time of supposed de-leveraging, even in this post destruction of wealth era. And with all major nations, (except maybe India), facing a glut of retirees that global economic growth, that store of fiat currency is pretty important.
Now I mentioned before about the whole "simple economics, monetary policy thing", technically if the money supply increases, inflation increases, the Fed gets in trouble, they raise interest rates, all is well. Well we know about the increasing wealth difference in societies, the famous GINI numbers, this helps insulate the problem. Because what does the Fed look at, what does congress grill the chairman about? CPI PPI, what the common people have to spend, what do the people selling to them have to spend, so values in investment options are not considered, BUT THEIR VALUE INFLATES ALSO, and by creating a scenario where the value of investments inflates but those values are not examined hides an overheating part of the economy, hides the problems created by increasing the money supply, hides the problems created by keeping the cost of capital too cheap.