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    Central banks hijacked to finance debt

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    Pat Angko

    Posts : 34
    Join date : 2012-03-29

    Central banks hijacked to finance debt

    Post by Pat Angko on 19th April 2012, 10:30 am

    Thanong Khanthong
    thanong@nationgroup.com April 13, 2012 1:00 am

    What is the purpose of having a central bank?

    In theory, a central bank manages the money supply or looks after price stability, and supervises the financial system. And it is supposed to function as an independent institution, free from political intervention.

    In the United States the federal debt has expanded by US$9.5 trillion over the last decade - from $5.7 trillion in 2000 to $15.2 trillion at the end of 2011. Zerohedge.com, on April 10, took note of this dramatic rise in American federal debt.

    The website quoted Neal Soss of Credit Suisse as saying that the US federal debt is still growing at $1 trillion a year, or $5 billion a day.

    This fiscal outlook is not sustainable. So for the time being, interest rates will have to be kept as low aspossible to delay the debt implosion. The US Congress, besides, does not seem to have any political will to raise taxes to keep the debt in check. This has led Soss to conclude that the era of central bank independence is over and that the Federal Reserve, like many other "central banks", is transforming its role to become the fiscal agent of the state.

    This means that the Federal Reserve will be continuing to monetise the federal debt. If there are not enough buyers of US Treasuries out there to finance the federal debt, the Federal Reserve will step in as the buyer of last resort.

    We have learnt from history that hyperinflation lies at the end of the road of debt monetisation.

    Interestingly, Alan Greenspan, the former chairman of the Federal Reserve, has said that the US will never default on its debt because it can always print the dollar to pay off the debt. Moreover, the Federal Reserve, he added, is an independent institution because there is no law specifying that it answers to any other US agencies.

    This re-interpretation of debt, money and the role of the central bank certainly has created great discomfort among holders of the US dollar, the de facto global currency of choice. Leaders of the BRICS countries (Brazil, Russia, India, China and South Africa) recently held a meeting to outline a new currency arrangement to trade with each other without a need to use the US dollar as the medium. We are witnessing a shift in global power plays.

    In Thailand, we are also seeing this inclination to assume that the Bank of Thailand is a fiscal agent of the government. The Finance Ministry would like the central bank to find a way to pay for the Bt1.4 trillion in debt carried by the Financial Institution Development Fund (FIDF). This debt is a legacy of the government's blanket bailout of the financial institutions in the 1997-1998 financial crisis.

    Instead of raising taxes to pay for this debt, the Finance Ministry has pushed the FIDF debt burden to the central bank instead. This will give it more room to create new debt as the Finance Ministry looks forward to raising the country's debt to gross domestic product ration from around 40 per cent to 60 per cent over the next four years to pay for populist spending programmes.

    In the meantime, the central bank has lost money badly from its foreign exchange intervention to stabilise the baht. The central bank's balance sheet is in the red by several billions of baht. So the situation has become rather tricky.

    Apart from managing the money supply, the Thai central bank is subsidising the baht to support exports at its own expense, and monetising the FIDF debt. In the future, if the government keeps running up its debt load with its populist spending policy and banks crash because of various bubbles, the central bank will eventually have to step in to monetise all the debt again.

    This brings us back to the question raised at the beginning: What is the purpose of the central bank in this flawed, manmade monetary system? affraid

      Current date/time is 26th April 2018, 10:14 pm