Longtime reader and friend of the blog Kapios had a very interesting question for me from Monday’s compilation of amazeballs awesomesauce:

I wish Trump went after the Central Bank as hard as he obliterated the Demoncrats. Baby steps I guess, but since he pressured the Fed director to print more, I don’t see this happening. Unless he plans to print money that actually belongs to the government. Someone did this a long time ago and he ‘killed the central bank so hard that it took them 70 years to recover’ to quote a documentary about the Fed.

I don’t know how informed you are about the inner workings of the Central Banks, but if you have time to research and make a post one day, I would appreciate it deeply. I still never fully understood their system if I’m honest.

I decided to answer it at length using a podcast, as I think my voice is probably rather more animated and less dry than my writing on the subject can ever be:

In terms of further reading and resources, here are a few good pointers:

• The book that inspired the title of this post and the podcast;
• Murray Rothbard’s classic polemic against central banking;
• The superb Mises Institute articles on central banking are, in my opinion, required reading;

And here is an excellent video that explains it all succinctly:

I did not address one critical aspect of central banking in my monologue, which is the latest (i.e. roughly 20-year-old) “brainwave” on the part of the banksters:

Quantitative easing.

If you understand what open market operations are from my podcast, you will understand that the central bank of any country will basically engage in buying and selling bonds, or entering into repo agreements, with other banks in the system.

This is an indirect way of affecting short-term interest rates to manipulate the base money supply.

But this only affects short-term rates. In order to affect longer-term rates, central banks have to get more directly involved.

So instead of going through the regular banking system, central banks will buy bonds straight from the government.

This has the effect of jacking up the price of those bonds, thereby reducing the effective yield on them. This also gives the government vast amounts of money directly into the coffers of their treasuries.

Because long-term government interest rates are tightly correlated with swap yields, mortgage rates, and a whole host of other critical long-term rates, the effect of reducing those long-term yields is to bend the yield curve downward and thereby completely screw up people’s future time preferences.

Central bankers defend this as essentially just another tool for preventing economic calamity. In reality, it simply makes such a calamity far more likely and vastly more dangerous.

Quantitative easing essentially amounts to flooding an economy with money by monetising government debt. It results in huge amounts of money chasing ever more limited goods and services. But if an economy finds itself caught in a trap, where you can’t really push interest rates down any further because there is virtually no incentive for any new economic activity from doing so…

Then you’re screwed.

That is known as the “liquidity trap”, and it is what keeps Keynesian economists awake at night. It’s their equivalent of the Bogeyman. It terrifies them.

Their understanding of it is incorrect, because they think that it is a purely monetary phenomenon. It isn’t. It is a structural issue. The reason why an economy gets stuck in the shitter, so to speak, is because all of the awful stupidity and bad investments and incredibly dumb decisions have not been cleared out of the system – to use an agricultural metaphor, the once rich and fertile fields of the economy have been choked with stinking weeds that are destroying the land, and those weeds have to be eliminated in order for growth to resume.

But the process of clearing out the weeds is also highly destructive to whatever good crops are still there in the field. And that is why governments and central banks hate the idea of allowing that very natural and normal process of economic burning to take place.

The result is that the weeds grow unchecked until a lightning strike sets them all ablaze, or until the field itself is rendered totally lifeless and inert.

And here endeth the lesson. If you have any more questions or comments, stick ’em down below and I’ll see what I can do to answer them.