Why Central Bankers Deserve Society’s Loathing

My disdain for central bankers has reached a new high…or should I say a new low?

Having followed this grossly inept group for many years and seen the full cycle (upside and downside) results of their blatantly stupid policy settings, the only logical conclusion to be drawn is, as a cohort, they are lazy, clearly incompetent, and arrogant beyond belief.

Why these academic blowhards even bother to turn up to the office is beyond me. They perform two basic functions.

Suppress interest rates — well below the rate of inflation — and vow and declare they’ll stay there until inflation is sustainably in the 2–3% range. Achieving their stated objective could take years. Therefore, between now and then, what do they do…twiddle their thumbs?

And should the artificially inflated markets they’ve created come off the boil, a missive is issued to crank up the printing presses. Wow, how long does it take to send this well-used templated communique off? I reckon all of 60 seconds.

That’s it…it takes you longer to brush your teeth than it does for these overpaid bureaucrats to execute their primary duties.

Yes, they produce fancy graphs and pretty pictures and get invited to speak at a fawning investment industry conference or two, but in a nutshell, ALL they do is keep their foot firmly on the throat of interest rates and keep the presses running.

Why do they want sustainably higher inflation? To create an upward wage spiral.

Why would they want wages to rise? To give employed households the capacity to borrow more.

Why would they want EVEN MORE debt on the nation’s balance sheet? Because that’s how they boost GDP numbers…which then creates the impression of economic growth.

Society puts an even thicker debt noose around its neck and pays higher prices for goods and services so these pompous and pampered PhDs get to keep their cushy gig going. Pure self-interest.

They have been getting away with this economic growth con for decades. Yet no one calls them out.

Imagine a breadwinner on $100k comes home and says ‘Honey, I’ve increased our household GDP by 50%.’

To which the response is ‘Oh darling, that’s fantastic, how did you do it?’

‘Easy. By borrowing $50k.’

If someone told us that with a straight face at a BBQ, you’d struggle to contain our laughter.

Yet, each quarter, central banks tell us the same thing and (almost) everyone accepts this economic claptrap as gospel.

Years ago, this chart was published to show the effect withdrawals from US home equity loans had on creating an artificially-high US GDP growth.

That episode of central banker illusion ended with the GFC.

GDP Growth

Source: Calculated Risk

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Central bankers are bone-lazy.

They lack the intestinal fortitude to make the hard decisions…balancing the interests of all society.

In telegraphing the intention of keeping rates low for years to come, in essence they are saying to savers ‘SCREW YOU, LOSER!’.

The appropriate interest rate policy would have been an inflation plus real rate of return of say 1% or 2%.

Yes, borrowing costs would have been higher, but is that a bad thing?

Look what’s happened with ultra-low loan rates…property prices have gone through the roof. Households have been forced to take on significant debt to get into the market.

Surely, borrowing $500k at 5% is a far better option than taking on $1 million at 2.5%? Same net interest cost, but far less principal to repay.

Yes, property prices would be lower, but so what?

As long as they appreciated with CPI, that’s OK.

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Central bankers don’t have to live in the world they created

Guaranteed taxpayer-funded pensions — with annual CPI adjustments — await upon retirement.

They have no skin in the game.

If I had power for the day, these pensions would be the first thing to go and replaced with a lump sum.

Then we’ll see how these bozos go trying to eke out a retirement income in a 0.1% world and/or the threat of losing half or more of their capital if/when the bubble they’ve blown bursts.

Their incompetence is writ large in this chart of the Dow Jones.

The Fed keeps doing the same thing over and over again and expecting a different outcome.

What’s that they say about insanity?

Dow Jones Price Outlook

Source: Macrotrends

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The 31 August 2021 edition of The Rum Rebellion was titled ‘33 Million Reasons for Jerome Powell to Act Out of Self-Interest’.

Based on Fed Chair Jay Powell’s 278E disclosure, we know around 60% of his estimate US$55 million net worth is invested in shares.

Which gives Jay 33 million reasons to act out of self-interest.

Here’s an edited extract from the 31 August 2021 Rum Rebellion:

The coronavirus meltdown hit hard and Jay’s 33 million reasons suddenly shrank by one-third.

Rather than accept this as “markets doing what markets do” and correcting an imbalance between value and price, Jay abandoned public interest for self-interest.

If he didn’t do something quickly, the remaining two-thirds of his family’s equity exposure might wither away to a much lower number.

When your portfolio is overweight shares and underweight cash AND you control the financial levers, what do you do?

Powell’s self-interest won the day.

Crank up the presses and expand the Fed’s balance sheet.

And in doing so, Powell opened the Fed’s “jaw” (even wider than Bernanke did in 2008/09) and breathed life into the market.

Federal Reserve Economic Data

Source: FRED

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Public interest be damned. The long-term damage from this reckless strategy will be for the next Fed chair to worry about.

His family’s 60% equity stake is now worth a whole lot more than it was BEFORE the March 2020 collapse. Well done, Jay.

This is not a good look for someone who is meant to be managing the world’s largest economy in a balanced and prudent fashion.

But when you live in a central bank bubble, the public are mere plebs and therefore, their perception of you counts for nought.

The accolades and ego stroking of the Davos crowd is what you really crave.

At the time, I copped a little flack for this ‘attack’ on Powell.

Well, it only took a week or so to be vindicated.

On 9 September 2021, The Wall Street Journal published this article ‘Two regional Fed chiefs to sell stocks to avoid appearance of conflict of interest’, here’s an extract (emphasis added):

The leaders of the Boston and Dallas Federal Reserve Banks said they would sell off individual stocks they own, invest the proceeds in diversified indexed funds or cash savings and cease trading in individual securities.

The Thursday announcement comes after the Federal Reserve Bank of Dallas this week disclosed that its president, Robert Kaplan, bought and sold millions of dollars in stocks and other investments in 2020. A disclosure from the Boston Fed showed that its president, Eric Rosengren, also was an active trader last year, albeit at a smaller scale.

Both men defended their actions as consistent with their respective bank’s code of conduct policies, but said they didn’t wish to create any perception that their trading of securities and investments would conflict with their role in setting monetary policy.”

Create the perception of a conflict of interest?

This statement just shows you how out of touch and arrogant these people are.

You’re sitting in the room deciding on a policy setting that can positively or negatively impact your personal financial (and/or trading) position. Gee…what do you do?

When the next crisis hits, I sincerely hope society joins the dots and central bankers get the long-overdue loathing they deserve.

One last point, it would appear Kaplan and Rosengren’s timing is perfect…after orchestrating the artificial pricing of markets, they’re now going to cash.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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