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Can Central Banks Stop Deflation?

Originally published by mises.org on May 12, 2018 Read the original article.

A long-held belief is that central banks have learned to control both money and economies.

Throughout the years, researchers at Elliott Wave International have noted that it’s hard to find a treatise on macroeconomics that does not assert such a belief.

Indeed, this sentiment appears to be expressed in a May 12 headline from Mises.org, which says: “Central Bankers Won’t Tolerate Deflation — No Matter the Cost.” Here’s an article excerpt:

Central banks have removed the discipline of gold, so they can intervene to prevent financial and economic crises, rather than let them run their destructive courses. They have fully embraced inflationism, giving them the excuse for monetary and credit expansion as a cure-all.

Therefore, when the next crisis occurs, central banks will take steps to ensure that in aggregate the quantity of money does not contract. It is the one forecast we can make with absolute certainty. And every time a crisis happens it takes more monetary heft to get out of it. But that’s not an issue for a central bank with two overriding objectives, not the targeting of inflation and unemployment as such, but to ensure a recession never happens, and to finance, through money-printing if necessary, escalating government spending.

Yet, the book, Conquer the Crash, expresses an entirely different view:

The very idea that [the Fed can control our money and economy, plus manipulate the stock market] is false. … Chairman Alan Greenspan himself called the idea that the Fed could prevent recessions a “puzzling” notion, chalking up such events to exactly what causes them: “human psychology.” In August 1999, he even more specifically described the stock market as being driven by “waves of optimism and pessimism.” He’s right on this point, but no one is listening.

The Chairman also expresses the view that the Fed has the power to temper economic swings for the better. Is that what it does? Politicians and most economists assert that a central bank is necessary for maximum growth. Is that the case?

This is not the place for a treatise on the subject, but a brief dose of reality should serve. Real economic growth in the U.S. was greater in the nineteenth century without a central bank than it has been in the twentieth century with one. Real economic growth in Hong Kong during the latter half of the twentieth century outstripped that of every other country in the entire world, and it had no central bank. Anyone who advocates a causal connection between central banking and economic performance must conclude that a central bank is harmful to economic growth. For recent examples of the failure of the idea of efficacious economic directors, just look around. Since Japan’s boom ended in 1990, its regulators have been using every presumed macroeconomic “tool” to get the Land of the Sinking Sun rising again, as yet to no avail. The World Bank, the IMF, local central banks and government officials were “wisely managing” Southeast Asia’s boom until it collapsed spectacularly in 1997. Prevent the bust? They expressed profound dismay that it even happened. As I write this paragraph, Argentina’s economy has just crashed despite the machinations of its own presumed “potent directors.” I say “despite,” but the truth is that directors, whether they are Argentina’s, Japan’s or America’s, cannot make things better and have always made things worse. It is a principle that meddling in the free market can only disable it.

Read this FREE REPORT: “What You Need to Know NOW About Protecting Yourself from Deflation.”

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