Listen to Episode 17: Daniel LaCalle, Part 1
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Listen to part two here.
Daniel LaCalle, Author and Chief Economist at Tressis Gestión, and I talk about his new book: Escape from the Central Bank Trap: How to Escape from the $20 Trillion Monetary Expansion Unharmed. Daniel tells us how rather than being the solution, central banks are becoming the problem by using “unconventional monetary policies” that were never intended to be the ultimate solutions. After analyzing the problems posed in his book, we find out how he believes we can escape the trap.
Brief Show Notes
Escape from the Central Bank Trap: How to Escape from the $20 Trillion Monetary Expansion Unharmed
Life in the Financial Markets: How they Really Work and Why They Matter to you
The Energy World is Flat: Opportunities from the End of Peak Oil
Central banks tend to believe that the cause of economic crisis tends to be a problem of lack of demand so they attempt to incentivize demand in order to promote more investment and consumption. However, this becomes a problem when it is made the norm.
We forget that all of this policy is paid for by the savers. Unconventional monetary policy is a massive transfer of wealth from the savers to the indebted parts of the economy, like the government.
There are three ways this money ends up in the hands of the government. First, there are unprecedented lending conditions. Second, is by crowding out credit. And third, by incentivizing debt and massive deficit spending there is massive financial repression.
Daniel LaCalle on what the “Central Bank Trap” is…
It is very easy for a central bank to enter into these unconventional policies: you just lower interest rates, increase the money supply, and hope for the best. While these policies may work, they aren’t adequate long-term solutions. The amount of money becomes so gigantic that the bank finds itself trapped.
A part of the solution is to be very systematic. Central banks need to be very clear about their objectives and what will happen when they reach them. They should communicate things that they do control, not second or third-derivatives of their objectives.
There is a tremendous risk in losing credibility. If central banks continue to provide messages about what the policies will achieve, but fail meet these ends, then citizens’ faith in the system will collapse.
The central bank at the end of the day is like the pyromaniac firefighter. They are causing problems and then stepping in as if they are the best solution. Many, many years ago they were providers of credit of last resort.
The book, however, really provides practical solutions needed to make it through the next financial crisis. These are needed solutions because banks have exhausted their tools.
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