Free Men Central Bankers, No Plan

There is a video making the rounds on Twitter and other social media platforms. It shows ECB President Christine Lagarde being interviewed, but this isn’t just a regular softball interview.

The interviewer pulls up a chart of the ECB’s balance sheet and asks what happened. They even ask whether Lagarde can sleep at night. As you would expect, the ECB President is not dumb. She hits back with a counter-factual response that essentially claims the central bank had no choice because of the pandemic and related-recession.

Enjoy the gist

The problem with this answer is that we don’t know what would have happened if the ECB and other central banks didn’t intervene. Would we have spiraled into a painful depression? Maybe. Maybe not. Even though I tend to believe the central bank intervention mitigated short term pain, the truth is that we don’t know what would have happened.

Another interesting aspect of Lagarde’s answer to this question was that they had no other choice. This assumes a default position of intervention combined with a lack of tools for central banks to tap outside of interest rate manipulation and quantitative easing. The lack of tools means every crisis gets the same treatment. If you have a hammer, it all looks like a nail.

Now that we are experiencing high inflation globally, the ECB has capitulated on their negative interest rate strategy and promises to get to 0% interest rates in the near term. They only have two tools, so they have to use them.

The big problem though is that destroying demand by making money more expensive doesn’t necessarily mitigate high inflation, but instead could cause a situation of economic contraction (recession) and inflation. Inflation + recession = big trouble.

So even though the first part of the conversation is hilariously awkward and seemingly ridiculous, the worst part is here.

The interviewer asks Lagarde how does the ECB plan to get the central bank’s balance sheet to contract and she says “it will come, it will come…in due course.”

This is utterly insane. One of the most prominent central bankers in the world is asked in public about their plan to reduce their balance sheet and the answer is essentially “trust me, we got it!”

Majority of people don’t trust central bankers anymore. And they are appointed officials, so we can’t vote them out of office. As Satoshi Nakamoto stated so eloquently years ago, “The root problem with conventional currency is all the trust that's required to make it work.

The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

We have all watched as trillions of dollars have been printed and stuffed into every exotic corner of the financial system.

Currencies around the world have been devalued at historic rates. Central bankers don’t appear to have a plan to reverse course or mitigate the damage from their previous actions.

This is why hundreds of millions of people globally are turning to bitcoin. The decentralized digital currency has a programmatic monetary policy that continues to protect the purchasing power of individuals over long periods of time. Of course, we have seen central bankers advocate for regulation, including potential bans of ownership, on bitcoin. They don’t like the free market competition that a digital currency provides to fiat currencies.

But pay special attention to what Lagarde says at the end of that interview — she is talking about her son and his ownership of bitcoin:

“he is a free man”

That may be the most truthful thing that Lagarde said in this interview. We are all free men who should have the right to store our wealth in whatever asset we would like.

If we take risk and it fails, then we live to suffer the consequences. If we take risk and it works, then we live to enjoy the results. But we shouldn’t live in a world where central banks, or their proxies, get to tell us whether we can use dollars, gold, or bitcoin.

Let the assets all compete in the free market and let’s see what happens.