From The Financial Times comes this analysis of current practices of Central Banks:
http://blogs.ft.com/gavyndavies/2012/01/08/the-unprecedented-behaviour-of-the-central-banks/#axzz1iyjFMFwX
Central Banks are – to be blunt – “printing money” at an extraordinary rate, and yet inflation is not happening. “Consequently, the correlation between the monetary base and the rate of inflation, which usually works in both directions, has broken down.” At least, no inflation yet. Read the article to see the charts.
The goal has been to “rescue the banking system and avoid deflation.” Without the support of government-central banks, the entire system might have collapsed. This was done by central banks purchasing goverment bonds, rather than raising money through the money market mechanisms which had dried up. The structure and financial frameworks seem to have been fundamentally changed. So far, so good.
Does it matter? It does help to remind us that the world’s financial system is not a “machine” built of iron and steel. It is a “concept” of ideas and non-tangible agreements about what people will value, and how that value can be traded as if it were real. Does this change in infrastructure really matter? Not as long as it works.
We only have several hundreds years experience in finance, which is not long enough to understand all the possibilities. I remember that in the 1960s Lake Erie hit “unprecedented” high water levels, and people scrambled to re-do zoning and build flood walls. Water level data had been collected for over a hundred years, and this was termed “a hundred year event.” It was expected that the basic data was correct for all times.
The next year, Lake Erie hit an all-time low.
100 years of data are not enough to understand a complex system.
