Managing a Crisis, by Alasdair Macleod

Governments and central banks have all sorts of tricks to make crises go away . . . for a while. From Alasdair Macleod at schiffgold.com:

This article concludes that the current downturn in bond yields is part of a continuing market manipulation by central banks in order to restore confidence in the global economic outlook.

There is a long history of government intervention in markets. In the nineteenth century, it was by legal regulation, the most notable of which was the 1844 Bank Charter Act, which had to be suspended in 1847, 1857, and 1866.

From the early 1920s, the emphasis on intervention changed under Benjamin Strong, the first Fed Chairman, who started to deliberately expand central bank credit to stimulate the economy. Coupled with the expansion phase of the commercial bank credit cycle, this led to the Roaring Twenties, the stock market boom, and its collapse.

Presidents Hoover and Roosevelt compounded the errors with economic interventions which only succeeded in prolonging the 1930’s depression. It was the start of modern government economic and monetary manipulation, which took on a new urgency under the fiat dollar in the 1970s.

While they create problems through their interventions, governments have perfected the art of managing markets to restore failing confidence in credit values. This was dramatically proved in the wake of the Lehman failure.

But if government intervention is behind the current decline in bond yields and interest rate expectations, it is only a temporary solution to G7 government debt traps, the squeeze on bank credit, and a deteriorating economic outlook. These are problems deferred, not resolved.

Introduction

You have to hand it to the authorities. While they are motivated against free markets and can’t stop interfering in our day-to-day affairs when the crisis that they themselves created finally hits markets and the economy, they prove adept at resolving it. That the fiat dollar has survived a repeated cycle of crises since the early 1970s is a testament to the fact.

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