Central Banks vs. Governments: The Fight of Our Times


American consumers and households have had to deal with inflation for well over a year now, with no signs that inflation is letting up anytime soon. And with recession on the horizon, the prospect of a double whammy of inflation and recession is making many people nervous.

There are two ways to tackle a recession, the right way and the wrong way. Choosing the wrong way could mean in our current situation could mean a prolonged recession, a sluggish recovery, and continued high inflation. And that choice is going to be decided by the interplay between central banks and governments.

The potential for conflict between central banks and governments could determine the direction the economy takes for the next decade or even longer. Governments want to forestall recession, or to see recessions ameliorated once they begin. But central banks want to fight inflation. It’s that tension between the two aims that could cause conflict, and that could leave the rest of us as collateral damage in the process.

Central Bank Independence Hangs in the Balance

While most central banks are government agencies, they’re given independence from the government to pursue their monetary policies, so as to be free from political influence. This is the vaunted “central bank independence” that central banks guard jealously. But the pressure on central banks to ease monetary policy could place that independence in jeopardy.

Right now central banks are fully engaged in the fight against inflation. They know that the longer inflation remains high and the longer it is tolerated, the more difficult the fight to control it is. And so central banks around the world are engaging in monetary tightening to try to get inflation under control.

With recession on the horizon, governments are worried about the potential for lower economic growth and heightened economic instability. The standard government policy response to recession is to try to spend money in order to boost economic activity. But with governments suffering from already high debt levels, spending money that they don’t have is going to be difficult.

If markets won’t buy new government debt, governments are going to expect central banks to step into the breach, as they did in 2020. And central banks are going to try to resist that, because they know that once they give in, they’re going to be expected to keep buying new government debt.

When central banks lose their independence and begin to monetize government debt as a matter of regular practice, bad things happen. Just think of Weimar Germany, early 2000s Zimbabwe, or more recently Venezuela.

No central bank wants to be just a rubber stamp allowing governments to spend money ad infinitum. The question that we could be facing in the coming years is who will win out, governments or central banks?

Recession vs. Inflation

It all will come down to what governments fear more, inflation or recession. On the one hand, inflation benefits governments because they are able to repay their debts with devalued currency. But on the other hand, if inflation gets out of control, it can lead to economic instability and political destabilization.

Every now and then a government fails to realize the danger that can come with unlimited money printing. That’s when you get a Zimbabwe or a Venezuela. Everyone thinks that it can’t happen here, but what happens if it does?

Once a central bank acquiesces to a government’s desire to have its debt monetized, it becomes that much more difficult to say no the next time. And since so much US government debt was monetized in 2020, the Federal Reserve is going to have a difficult time saying no to the Biden administration when the inevitable political pressure increases to start easing monetary policy in response to recession.

Right now President Biden is enjoying very low approval ratings thanks to high inflation. But a recession would likely sink his numbers even further. If inflation is wreaking havoc on Democrats for the midterm elections, a full-blown recession could be even worse for Democrats in 2024.

That’s why there could be increased pressure put on the Fed to pivot from fighting inflation to fighting a recession. Even though the Fed’s mandate is to ensure stable prices (i.e. fight inflation), expect the administration to point to the other part of the dual mandate, full employment, if unemployment rates begin to rise as a result of a recession.

Pivoting before inflation is under control would likely mean a return to quantitative easing and large-scale asset purchases, something that could mean a return to even higher inflation rates. And in a worst case scenario we could end up seeing repeat of the 1970s, a decade marred by high inflation and a sluggish economy.

Protect Yourself With Gold and Silver

While the economy may have been stagnant during the 1970s, not everything was. Gold and silver, for instance, grew at annualized rates of over 30% over the course of the decade. Those who had the good fortune to take advantage of owning gold and silver during that period could have seen far better returns on precious metals than other investments.

Many people today are hoping that gold and silver will demonstrate similar performance today, especially if inflation remains stubbornly high. They also remember the performance of gold and silver in the aftermath of the 2008 financial crisis, and how gold and silver made phenomenal price gains while markets struggled to correct after the crisis.

If banks and governments end up in a tug of war over whether to fight inflation or fight recession, your savings and investments could end up getting caught in the middle. And unless you take steps to protect yourself, you could lose out no matter which way the fight goes.

Fighting inflation and allowing recession to occur, or even worsening a recession, could lead markets to collapse, harming the value of your investments. Hopefully there would be a recovery afterwards, but do you have years to allow yourself to recoup those losses? Fighting recession could mean more quantitative easing, which could boost inflation, meaning that your real returns on investments could remain low or negative for quite a while.

With gold’s reputation as both an inflation hedge and a safe haven asset during times of recession, owning gold during these turbulent times could help you weather any upcoming turmoil, whether central banks win out or governments do. And one increasingly popular method of owning gold is through a gold IRA.

A gold IRA allows you to own physical gold coins or bars in an IRA account that enjoys all the same tax treatment as any other IRA account. And you can roll over or transfer assets from your existing 401(k), 403(b), TSP, IRA, or similar retirement accounts into a gold IRA tax-free.

Don’t allow your hard-earned savings and investments to fall victim to the tug of war between governments and central banks. Call Goldco today to learn more about safeguarding your savings with gold

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About the Author: Paul-Martin Foss