Will Our System Fail Like The Soviet Union?

THE global financial system has been hijacked by an “unelected dictatorship” of communist central bankers who are steering the world towards a Soviet-style collapse of epic proportions.

No, it’s not the ravings of a “Zerohedge nutter or freak”, but a sober warning from leading economist Vimal Gor, head of income and fixed interest at BT Investment Management.

Mr Gor has used his monthly update to clients to tackle the elephant in the room: the failure of record low interest rates and money-printing programs to stimulate global growth, and the ever-increasing and undemocratic powers of central banks.

“[Our] financial system … feels like we are living in the Matrix,” he writes.

“Everyone tells me the world I live in and the markets I position in are capitalist and democratic, but then why does it feel so much like a dictatorship where unelected people control everything?”

Mr Gor argues that pre-GFC, central banks’ decisions on short-term interest rates were only one of a number of factors that impacted growth, and that fiscal policy and government regulation were arguably more influential in driving structural growth.

“But as politics globally becomes more partisan, less and less gets done and therefore fiscal policy sits on the backburner, which has meant the central banker’s role has morphed into something grotesque,” he writes.

Central bankers now “attempt to control the price of everything”, from the short-term interest rate via monetary policy and long-term yields through bond-buying programs, to the price of equities via direct buying and even the level of currencies through money-printing programs.

“[And] remember, these institutions are all unelected and largely unregulated,” Mr Gor writes. “A central banker effectively has total control everything. As Uncle Ben said in Spiderman, ‘With great power comes great responsibility’, but who are the central banks responsible to?”

Mr Gor goes as far as to argue that the main role of central banks is fundamentally anti-capitalist, because control over interest rates implicitly gives control over the value of all riskier asset classes, rather than a pure capitalist system in which the market decides everything.

“Doesn’t this mean that the way global economies and markets are now run is either the communist model or a dictatorship masked as a capitalist democracy?” he asks.

“The slow transition from a capitalist society to a communist-lite one isn’t in our view just a thought experiment, it is there in fact. What else are the much-lauded macro-prudential tools that central bankers love so much if not a direct way to control the price of credit?”

While he doesn’t suggest a “conspiracy”, he says he is “considering what happens if the institution of the central bank and the academic theory that it is built upon is flawed and is hurting far more than it’s helping”.

“How do we know that, if the market never actually had a chance to decide, that short rates should be at 10 per cent rather than deeply negative?” he asks.

“If interest rates are low and growth is weak the typical central banker’s response is to cut rates further, but what if the low rates are causing the slow growth, that’s a pretty bad mistake to make isn’t it?

“So let’s continue down the rabbit hole and ask the ultimate question, which is — if central bankers are acting like communists, then will our system fail spectacularly like, for example, the Soviet Union?”

The western world is currently seeing its own “revolt” in response to inequality and low wages — issues that “exist because of the failures of monetary policy” — in the form of populist, anti-establishment and pro-protectionist movements, Mr Gor writes.

And the end game, he warns, is the relinking of governments and central banks.

“This gets around the central bank’s independence, making it purely just a tool for the government to have unlimited capability to provide capital for the greater good,” he writes.

“We have no issue with governments taking advantage of super low interest rates to provide fiscal stimulus, but printing money to do that is a step that should be taken with incredible caution.

“History hasn’t been kind to those countries that have stepped down this route, examples of what occurred in Japan, the Weimar Republic and the step to World War II are very hard to ignore.”

Courtesy of News.com.au, written by frank.chung@news.com.au

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