by Charles Hugh-Smith
Central-planning manipulation “works” by closing all the safety
valves of market feedback, creating a dangerous but politically
appealing illusion of stability and “growth.”
If we see the economy as a system, we understand why removing or suppressing feedback inevitably leads to financial crashes. The
essential feature of stable, robust systems (for example, healthy
ecosystems) is their wealth of feedback loops and the low-intensity
background volatility that complex feedback generates.
The essential feature of unstable, crash-prone systems is
monoculture, an artificial structure imposed by a central authority that
eliminates or suppresses feedback in service of a simplistic goal–for
example, increasing the yield on a single crop, or pushing everyone with
cash into risk assets.
Resistance seems futile, but the very act of suppressing feedback dooms the system to collapse.
Removing or suppressing feedback seems to work wonders because the
systemic risks generated by this suppression are pushed out of sight. The euro is an excellent example of this dynamic.
The system of national currencies is in essence a gigantic feedback
mechanism, as the relative value of a nation’s currency reflects its
cost structure, trade deficits or surpluses, fiscal deficits, interest
rates, central bank policies and a host of other inputs.
A currency that is allowed to fluctuate acts as a “safety valve” feedback when an economy become imbalanced. If
the costs of production in one nation are relatively high, its exports
will decline and its imports will rise. This leads to large trade
deficits, which (except in the case of the reserve currency, the U.S.
dollar) lead to lower currency valuations, which feeds back into imports
and exports: imports become relatively more expensive as the currency
loses buying power internationally, and exports rise as the nations’
goods and services become relatively less expensive to other nations.
The net result of this currency feedback loop is to lower imports and
increase exports, bringing the trade deficit back into relative
balance.
The euro effectively removed this complex feedback from all the economies that accepted the euro. This
is the root cause of the European debt crisis: credit was allowed to
reach insane levels of fragility and excess because the feedback that
was once provided by national currencies and central bank/fiscal
policies was removed from the system.
This is why claims that the European Central Bank (ECB) will “do
whatever it takes” to maintain the euro’s suppression of feedback are
doomed to failure.Removing or suppressing feedback allows risk and
structural imbalances to pile up to the point they threaten the entire
system. This is the case in Europe, Japan, China and the U.S.
In Japan and the U.S., the central banks and fiscal authorities in
the central state have suppressed market feedback by pushing interest
rates to near-zero and then using the central banks’ unlimited ability
to create money to buy government bonds. This suppresses feedback from
the bond market and from the political sphere, as cheap money and
unlimited issuance of government debt (bonds) enables politicos to avoid
painful restructuring and choices.
If you eliminate feedback from the markets, you get asset bubbles and huge deficits. Those
extremes goose “growth” for the short-term, but the suppression of
feedback only dams up risks and imbalances: out of sight, out of mind.
But the imbalances haven’t vanished; they’re piling up unseen in the
system, where they eventually break out at the system’s weakest point.
Central-planning manipulation “works” by closing all the safety
valves of market feedback, creating a dangerous but politically
appealing illusion of stability and “growth.” But the consequences of
removing or suppressing feedback are catastrophic longer term, as the
imbalances and risks pile up unseen until they bring down the entire
system.
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