Man of the Year 2012

The Year of Monetary/Fiat Currency Meddlers

• Central Bankers

• Ben Bernanke, US Fed Chief

Courtesy of Google

• Mario Draghi, ECB Chief

Courtesy of Google

 National Leaders

• Shinzo Abe, incoming Japanese PM

Courtesy of Google

•   Cristina Fernández de Kirchner, Argentinian President

Courtesy of Google

•  Hu Jintao, President, People's Republic of China

Courtesy of Google

While Time website voters chose the latest descendant of North Korea's fusion Communist monarchy and its insipid, self-deluding editorial board chose Barack Obama for the second time in 5 years, putting lipstick on a pig of his dismal record (skipping by his more than doubling the public-held debt, the first credit downgrade in US history, his failure to produce a viable budget or address out-of-control entitlement spending, his utter lack of proactive leadership (e.g., his procrastination on expiring tax cuts in 2010 and 2012 and on the debt ceiling last year), material policy failures (e.g., civil liberties, climate change and immigration), his expanding, unsustainable  house of cards of government meddling in health care, i.e., ObamaCare (disingenuously promoted as "deficit-reducing" using accounting gimmicks like cost-shifting and double counting), responsibility for the trillion dollar college student loan bubble, the lowest labor force participation rate (for which he has no response except excuses and finger-pointing), "financial reform" which implements a crowning jewel of crony capitalism, "too big to fail",  escalating drone attacks and meddling in the Middle East, more than doubling American casualties in Afghanistan, and much more).

Is the emperor wearing clothes? We now seem to be in the age of the printing press. This is NOT a turn for the better: fiat currency is faux wealth; it  is simply a medium for exchange--it doesn't create goods or services, the real economy. The absolutely last thing we need is a vicious cycle of "beggar thy neighbor", in a race to the bottom, to export a country back to prosperity on the backs of other countries' consumers. The same holds true of rigging interest rates; artificially low rates encourage malinvestments and punish saving and future consumption. But the real problem with government printing is the loss of purchasing power and/or ruinous inflation.

Being named in this post is no honor but it reflects power and influence over an economy;  that power is intrinsically illusory, wrong-headed, anti-consumer and disastrous in the long term. I believe in free markets and the free market, including floating currencies. Monetary policies create uncertainty and obfuscate business decision making. The above list is not intended to be exhaustive, but illustrative. I will briefly comment on each leader.

Ben Bernanke is listed for the this "honor" a second year in a row. Why? Among other things, Bernanke has been a beneficiary as foreign investors have looked for the safety of the world's reserve currency in the midst of the European crisis.  However, Bernanke has vowed to maintain quantitative easing (bond-buying) and indefinitely keep interest rates near zero for most of Obama's Presidency, well below the core rate of inflation, at least until official unemployment is 6.5%. (In part, Bernanke is hoping that the real interest rate below zero will get savers to spend or invest rather than risk further real erosion of their savings: he himself takes credit for stock market growth. In tact, bargain-basement mortgage rates have boosted the home builder sector. However, China and Japan, the largest foreign holders of US debt, have shown little appetite for buying new Treasury debt, leaving the Fed to pick up the slack, essentially monetizing the debt.

Draghi is extending some of the same Fed powers and policies in a European context. The ECB has gained supervisory oversight of European banks and  motivated by investor reluctance to buy Italian and Spanish government debt,

The ECB had long resisted using its most powerful tool—its printing press—to save struggling European governments from the debt crisis. The Bundesbank, Germany's influential central bank, warned of dark consequences if the ECB tried that. Now Mr. Draghi, the ECB's Italian chief, was signaling that it would defy its biggest shareholder .By agreeing to create money to purchase struggling countries' debt without limit, the ECB has ushered in the decisive phase of Europe's battle to save the euro. 

Shinzo Abe has vowed to weaken the yen to bolster Japanese exports and snap the Japanese economy out of its generation-long deflationary slump. (Of course, be careful of what you wish for: inflation hurts consumers, bondholders, and costs of doing business including imported commodities in a country with limited natural resources, especially energy, and other goods.)

I have criticized President Cristina Fernández de Kirchner on multiple occasions. Persistent high double-digit inflation has resulted in major protests; the government has been publishing unrealistically high GDP numbers, low inflation numbers and criminalizing independent, higher numbers, exacerbating tensions with the IMF.

I'm not engaging in China bashing in the pegged currency manipulations. (In essence in a trade imbalance, the demand for yuan exceeds the supply .To satisfy the demand the Chinese central bank prints yuan and buys dollars; it has then used dollars to purchase interest-bearing US Treasury bonds (among other things). To control domestic inflation, it sells domestic bonds. See also here.  Peter Schiff has a very good relevant essay here.) But by manipulating the market the Chinese pay more than they should for imported resources and consumers are worse off. The Chinese economy succeeds despite of, not because of central planning and political monopoly.