The Stockholm Syndrome and Printing MoneySubmitted by DeMolay on Thu, 05/09/2013 - 03:55
Terry Burnham:We are hostages to the destructive actions of central banks. Printing money destroys value. The puzzle is not economic, but rather psychological. Why do we allow Central Bankers to make us poorer and endanger us physically?
The answer lies in our non-rational brains. One aspect of our psychology, labeled the Stockholm Syndrome, is the human propensity to develop positive feelings towards captors in a form of traumatic bonding.
Nils Bejerot coined the phrase after a 1973 Stockholm bank robbery where four hostages were held for close to a week. Even after being released, the hostages showed sympathy for the robber, and blamed the police. The most famous U.S. incident is that of Patty Hearst, who joined the organization that kidnapped her and took part in a bank robbery with her abductors.
The phrase "economy supported by central banks" generates more than half a billion Google hits. Can it really be true that printing money is going to make us rich? No.
Printing money can destroy an economy, or its effects can be close to neutral. Destruction occurs when the money printing severely distorts economic decision-making. My catastrophic view is that printing money by central banks in recent years has had three main impacts:
Printing money destroys wealth.
We cannot see the full impact yet of recent printing, but we can look at the last round of printing. After the NASDAQ crash in 2000, the Fed funds rate of very short-term (overnight) interest rates was cut from 6.5 percent to 1 percent. The unemployment rate at the time was a little over 5 percent. The subsequent problems created by the Fed were much larger than any short- term benefits during the low-rate periods.
Printing money shifts wealth from the prudent to the profligate.
The Federal Reserve is specifically trying to drive down interest rates. Borrowers are happy to pay fewer dollars in interest. For every dollar not paid in interest, there is a saver that is made poorer. To the extent that the Fed is able to reduce interest rates, it transfers money from savers to borrowers.
Distorting prices leads to bad decisions.
Interest rates are prices and incorrect prices lead to bad choices. The most obvious of these are investments in risky assets because lower risk assets have rates close to zero. We will only see the impact of the bad decisions in the future, but we can be sure they are being made now.
DAVID STOCKMAN AGREES WITH BURNHAM:
What Are the Risks of Low Interest Rates?
Even the supporters of the Fed's creation of money argue that at best, it would be only slightly positive. So we return to the central question. How can we believe that printing money will make us rich?