A Golden Way Out of the Monetary Fiasco

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The
government-controlled monetary regime – the most destructive
force set into motion by state interventionism – has finally
been blown to pieces. This is the message conveyed by the monetary
fiasco in global capital markets, typically referred to as the international
credit crisis.

However, politicians
and central bankers the world over are taking great efforts to hide
this truth and its full consequences from the public’s attention
by taking recourse to even more far-reaching market interventionism.

Central banks
provide commercial banks with any amount of base money needed to
prevent them from defaulting on their payment obligations. The Federal
Reserve, for instance, keeps expanding the monetary base at the
highest rate seen since 1919 (see graph below).

The Federal Reserve has started monetizing various types of paper
assets. As a result, the Fed’s balance sheet volume rose from US$909
billion to US$2,189 billion from the end of August 2007 to the middle
of November 2008, much of it reflected by a considerable rise in
deposits held by depository institutions, the US Treasury, and others
with the Fed (see graph below).

What is more, not only the Federal Reserve but virtually all other
major central banks have cut interest rates sharply to cheapen funding
costs for commercial banks and borrowers in general (see graph below).
By pushing official interest rates down, central banks hope to unfreeze
credit markets, support asset prices, and keep the economies on
an expansion path.

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the rest of the article

January
9, 2009

Thorsten
Polleit [send him mail]
is Honorary Professor at the Frankfurt School of Finance & Management.

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