Without a doubt, we are living in a period of unprecedented central planning on the part of the world's major central banks. Almost everywhere that markets could be free, we instead find a top-down, socialist command economy running the show.
This situation has been accelerating over the last two decades. What's baffling about this trend is that it has repeatedly failed, leading to one financial crisis after another. Nonetheless, virtually every advanced economy in the world is deeply ingrained in the in central planning.
At its heart, economics is about people: what they produce, what they consume, and how they create value (among many other components). There is no more condescending nor elitist idea than the notion that these actions can be dictated and controlled from the top. This is exactly what central planners believe they can do.
Must we all suffer from their failures, which were doomed from the beginning?
Consequences of Central Planning
The first and foremost problem with using central planning as an economic policy is that it distorts the information (data) we receive from the economy and interferes with the normal operation of the markets. By trying to make exchange between (and activity among) people fit into its pre-planned mold, a state with a centrally-planned economic platform must rely upon subsidizing, socializing, and regulating everything.
For one, this is costly and inefficient process—not to mention one that is ultimately ineffective. It conditions market participants to rely on the central government to be its safety net, or "lender of last resort." This incentivizes "misbehavior" because banks and other financial institutions know that they can always be bailed out by the federal government, the central planner.
The truth is that they can't be rescued by an insolvent government. Markets and investors alike in the U.S. (and elsewhere, to be sure) have gotten hooked on the easy-money policies of the Fed's central planning. Now, they constantly look to the central authority to intervene anytime there's a market correction. They prevent the free market from correcting for the imbalances this behavior creates, providing cover for the greedy practices that pile up debt and create dangerous credit bubbles.
One wonders, did we learn nothing from the financial crisis and the Great Recession?
To Hike or Not to Hike (More QE)
At this point, one of the several fundamental flaws of central planning is cropping up: the Fed and other central banks are running out of tools to control the markets and the economy. They have reached the lower bound of interest rates, and in some cases have even resorted to negative rates.
The past lessons about this flawed approach abound. In 1989, Japan made the grave error of over-inflating its currency during its ascendant economic boom. This not only derailed the boom time, but has left the country stuck in two "lost decades" of economic stagnation. Once the fastest-growing economy in the world during the 1980s, Japan is the poster child for trying to over-stimulate an economy.
We are now seeing the same methods employed in Europe, and obviously the Communist regime in China remains committed to centrally-planned economic policy. We are now seeing the impact of this strategy as the Chinese economy begins to see leaks in the ship left and right.
Will the Federal Reserve resist the impulse to use more distortion and monetary stimulus—known as quantitative easing (QE)? Over the past 15 years, the Fed has repeatedly resorted to this sort of central planning following a period of recession or crisis, thereby setting up a cyclical repeating of the problem. Until this cycle is broken, there will never be a real economic recovery: just one bubble after another.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.