Friday, 8 April 2011

Reversing gears

As raw material prices rise, huge price pressure are beginning to build in many of the developed economies which rely on imports to meet their raw material and energy needs. And whilst these pressures build up, many central bankers continue to scratch their heads and plead not guilty to the charge they are responsible for these pressures. The markets and an increasing number of economists disagree. The correct prescription is staring them in the face. Inflated monetary bases, into which those with means (aka rich speculators) can tap into, have fed into higher asset levels including illiquid commodities markets.

The central banks who are patting themselves on their back for giving consumers' a freer ride need to understand that what they have given with one hand, they have now more than taken away, through higher raw material costs, with the other. At the same time they have caused a massive and irreversible wealth transfer from the west to ideologically distant and non-democratic parts of the world.

As I may have stated in the past, there is no free lunch. To thrive you have change the infrastructure and practices of a nation not merely print paper. This is the main conclusion, many of the ostriches presiding over central banks, must acknowledge. That is, in order to revert to normal growth without an exorbitant wealth transfer to commodity rich nations, monetary bases must decline and interest rates must go up, sooner rather than later. Only then can we get on with the hard work of transforming our aged economies into competitive ones. The greater the delay through dangerous monetary experiments, the greater the likelihood that we will transform the western nations into likenesses of the economic minnows we pride ourselves today in our ability to bully around. Of course, if we do not recognise this soon, bankers such as Bernanke and King may well be positioning themselves for a place in history as the primary custodians of the Western affluence and who brought about its permanent and perhaps irreversible decline. The words being used to defend their monetary policies have begun to sound hollow. It is still not too late to reverse gears and use knowledge acquired from past mistakes.

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