Categories:
Base Metals
/
Energy
/
General Market Commentary
/
Precious Metals
Topics:
General Base Metals
/
General Energy
/
General Market Commentary
/
General Precious Metals
The Coming Crisis in Central Banking
The Coming Crisis in Central Banking
by Martin Armstrong
The question of when will central banks fail is a popular one that comes in. Suffice it to say, the turmoil will hit Europe first. While so many people blame the Fed for all sorts of things, you must realize that Roosevelt usurped the Fed during the Great Depression and imposed a single interest rate administered from Washington. It was during April 1942, when the Department of the Treasury requested the Federal Reserve formally to commit to maintaining a low interest-rate peg of 3/8% on short-term Treasury bills. The Fed also implicitly capped the rate on long-term Treasury bonds at 2.5%. This became the known as the “peg” with the express goal to stabilize the securities market and allow the federal government to engage in cheaper debt financing of World War II, which the United States had entered in December 1941. Today, we have extraordinary low rates of interest that have funded government, but has wiped out the real bond markets insofar as being a viable market long-term. The World War II accord to maintain low rates was followed by a collapse in bonds after 1951 once the accord ended. We will see the same outcome moving forward.
At the time, in order for the Fed to maintain the peg, it was ordered to give up control of the size of its portfolio as well as the money stock. That is also what has happened today with Quantitative Easing among all central banks. Frankly, the Fed back then maintained the low interest rate by buying large amounts of government securities, which also increased the money supply domestically at the time. Because the Fed was committed to a specific rate by the peg, it was compelled to keep buying securities even if the members of the Federal Open Market Committee (FOMC) disagreed.
After the war, politicians were afraid of a new depression would emerge as they always fight the last war. They ordered the Fed to maintain the peg even after 1945. The United States entered the Korean War in June 1950. The problem was inflation not deflation. The FOMC of the Fed argued strongly that the continuation of the peg would lead to excessive inflation. A real confrontation with the politicians was brewing all year and they opposed by the Treasury who naturally wanted to keep borrowing at cheap rates.
Everything exploded by February 1951. In inflation had soared reaching 21%. As the Korean War intensified, the Fed faced the possibility of having to monetize a substantial issuance of new government debt coming out to fund that war. This only intensified inflation. Nevertheless, Harry S. Truman became president in 1945 and it was his administration that continued to urge the Fed to maintain the peg.
The financial crisis erupted into a major conflict when Truman invited the entire FOMC to a meeting at the White House. Truman then issued a statement saying that the FOMC had “pledged its support to President Truman to maintain the stability of Government securities as long as the emergency lasts.” In reality, the FOMC had made no such pledge. Conflicting stories began to appear about the dispute in the press. The Fed then made an unprecedented move – they release the minutes of the FOMC’s meeting with the president.
To continue reading please click link https://www.armstrongeconomics.com/world-news/banking-crisis/the-coming-crisis-in-central-banking/