The Coming Failure of Confidence: Central Bank Edition

The unprecedented globally coordinated bailout of the financial system in 2008 forestalled the day of reckoning. There was solid growth in China and emerging markets, while the developed world staved off collapse. Financial markets recovered and went on to new highs, derivative growth resumed and politicians in Germany and the U.S. were re-elected. Behind the scenes, risk in the financial system increased rather than decreased. Social mood deteriorated, reflected in rising international tension and conflict. The public around the world is increasingly distrustful of politicians and bankers. When the next crisis comes, even if it is smaller than 2008, the political result would be far greater because of the changed attitudes and mood of the public.

Here is one case in point. While it is quiet now due to a bull market in stocks, an anti-central banking movement has taken root in the United States and the current political leader of this movement will be a front runner for the Republican 2016 presidential primaries. Meanwhile, the central bank is insolvent. If the central bank requires a bailout by the Treasury, it could go in any number of directions depending on who is in charge of the Treasury department at the time. Policy could range from an extremely unpopular bailout of the central bank to the abolition of the central bank. None of this will happen in isolation due to the U.S. dollar's role as reserve currency.

Skip to 30:30 in the video for the relevant part about the Fed being insolvent. (Link: Real Conversations: Rickards, McCullough Unplugged on Fed, USD, Economy & More)