A government takeover of capitalist economies may result from the expanded role of central banks in controlling the direction of free markets.
That’s the prediction of Peter Schiff, the president and CEO of Euro Pacific Capital Inc. who has criticized the Federal Reserve for distorting markets and pushing investors into high-risk investments. The central bank has held interest rates near zero percent since 2008, when the U.S. economy declined the most since the Great Depression.
“Exploding debt, financial distortion, prolonged stagnation, recurring recession, and the eventual government takeover of industry and the economy,” Schiff writes in a blog post
. “This appears to be the preferred alternative of politicians and bankers who simply refuse to let the free markets function the way they are supposed to.”
For insight on the direction of U.S. growth, he points to Japan, which has tried to revive its stagnant economy
since the 1990s with expanded interventions by the Bank of Japan. The central bank not only has kept interest rates at record lows, but also has supported the country’s equity market by buying exchange-traded funds that put cash into stocks.
The Bank of Japan is contemplating its next step: Making direct purchases of stocks.
“Such purchases would allow the Japanese government to accumulate sizable voting interests in some of Japan's biggest companies,” Schiff writes. “These possibilities should horrify anyone who still retains any faith in free markets. Purchases of equities would involve a stealth nationalization of industry, and would represent a hard turn towards communism.”
The Fed limited its buying to government bonds and mortgage debt during several rounds of “quantitative easing” from 2009 to 2014. It accumulated
$4.5 trillion of assets from banks to encourage them to lend to consumers and businesses.
The stock market more than tripled to record levels as investors bought equities in the search for yield and growth not found in the bond market. But economic growth
adjusted for inflation hasn’t moved any higher than 3.1 percent a year during the most recent recovery, making it the weakest rebound in the post-World War II period.
“Many American observers will take comfort in their belief that the United States has already concluded its QE experiment and that we are heading in the opposite direction, toward an era of monetary tightening. This greatly misjudges the current situation,” Schiff says in the post, titled "QE's Creeping Communism.' “The U.S. economy is slowing remarkably, and despite the continuous assertions by the Fed that rate hikes are likely in the very near future, I believe we are stuck just as firmly in the stimulus trap as Japan.”
He says the free market would have healed more quickly without the continued interventions by central banks.
“If interest rates were never manipulated by central banks and QE had never been invented, the markets could have purged themselves years ago of the speculative bubbles and mal-investments,” Schiff says. “Sure we could have had a deeper recession, but it also could have been much shorter, and it could have been followed by a far more robust and sustainable recovery.”
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