When the Central bank is the top money-print lobbyist...

What is the main function of the Central bank? To keep the price stability. This is not just a whim of any ancient economist. This is a result of natural evolution of money management. Once upon a time there had no Central banks. The money was gold and silver and its value was based on the value of gold and silver. The paper money were invented later. As the paper has no its own value, it had to be granted by the government. First the guarantee was the gold in government's treasury. After that, the guarantee became the Central bank and the confidence in it.

The Central bank has no other asset except the confidence. The job of the central bank is to guarantee the money will have constant value - just like with naturally stable value of gold and silver. The stability is required for any asset to become money. People require the money to be stable - just like gold and silver. Paper fiat money has inherited this requirement from gold and silver and can not run away from it.

This week we heard the impressing news that ECB Chairman Mario Draghi is in talks with Bundesbank President Jens Weidman, in attempt to have his support for additional money-print. Mr Draghi wants ECB to buy enormous quantity of government bonds in attempt to lower the interest rate on them.

Such behavior coming from a Central bank boss is very strange. Usually the Central bank is in opposition of such ideas, and the pressure for them comes from the governments. And this is so even in highly dependent central banks. I remember in my own country (Bulgaria) in 1996 the parliament intervened in Central bank functions and passed a decree that obliged The Central bank to finance directly the government. Even then, and even by a Chairman elected by the same parliament, has come an opposition of such decision. Anyway the decision was implemented and soon after that we saw an impressive inflation.

But the Chairman and the Bank were against this.

Now Mr Draghi is doing exactly the opposite. He is agitating for money-print and is trying to find support for it. So is Draghi a real boss of a Central bank? Or is just a government spy injected in the bank...

Draghy is ruining the confidence in Central bank and this way is ruining the Euro - exactly the opposite he is obliged to do... Paper money cannot run away from the requirements for gold and silver. Stability and confidence. Any breach of this rule is leading to a crash of the paper money. Just as it would happen if the confidence in gold and silver was lost (although rare in history there are even such instances). But generally  gold and silver have their own confidence resource, while fiat money have only the confidence of their Central bank. That is the system and the bankers must follow the rules...

There can not exist a central banker that is lobbying for easing the monetary policy. The policy can be eased, but in all times central bankers must be fighting against this. If a central banker is fighting for a money-print, so the situation is not optimistic.

Mr Draghi is arguing that something must be done to be saved the Euro zone and no country to leave it and re-issue its own currency. But this is a bad thinking. ECB is not equal to Euro zone and ECB is not the only component of Euro zone. ECB is the Central bank of Euro zone and its job is to keep the price stability and the stability of the Euro. Saving the Euro zone is a job of member-states that must implement appropriate policies that will resurrect the confidence in bond-investors, will balance the government budgets and stimulate the economic growth. All this is not a job of Central bank, nor any other its activity can substitute the lacking efforts of member-states.

There is an illusion that by printing money and pressing the interest rates down, the crisis will be defeated. In fact the opposite will happen. A destabilization of money supply and an inflation will be added to the current problems. When we see 200 Euros per barrel and 2-3 Euros per liter of gasoline, then believe me, we will have much more serious problem... And civil unrest will be much more motivated and aggressive. Inflation stimulates much more anger and pressure for compensations than the spending cuts and austerity. So if we don't like austerity, it is a top foolishness to run in a way of money devaluation.

Therefore Mr Draghi must have any other job, but not a Chairman of ECB. Obviously this is the most unsuitable job for him...

Dobri
July 28th 2012

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