The Alchemists: Three Central Bankers and a World on Fire

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On the heels of the greatest financial crisis since the Great Depression, powerful forces have conjured up vast sums of money from thin air, all in hopes that their concerted efforts will help transform the paper rags of yesteryear back into wealth and riches.

In a recent interview with Financial Sense Newshour, Neil Irwin sits down with Jim Puplava to discuss his latest book, “The Alchemists: Three Central Bankers and A World On Fire,” where he offers an inside look at the world of money creation and what the three major central banks did to prevent a possible catastrophic collapse of the global financial system.  

To start off the interview, Irwin explains:

“It’s awkward to think of money as being not so much a physical object not backed by gold, not even really worth the paper it’s printed on, but rather an idea. What modern societies have done is trusted these central banks to manage those currencies, to determine the value of that money, to either turn the dial to put more money into the economy or less.”

When money has no substance, it doesn’t take much human effort to bring it into existence. When people often think of billions of dollars being created out of thin air, they often imagine piles of money stacked high on crates or filling a wheelbarrow. Distributing vast sums of money was a physical process that once required some heavy lifting. But now, Irwin explains, it’s simply done by three guys behind a computer:

“I actually have a scene in the book when the quantitative easing program, QE2, was announced by the Federal Reserve. I actually saw the room at the New York Fed where they carry that out. It’s kind of three mid-level guys sitting at computers—there’s a supervisor behind them and a tech person watching everything to make sure the computers work; and when they inject $3 billion in one morning into the financial system, they take bids and carry that out and with that clickity-clack on the keyboards it’s money being created out of thin air. I think it’s uncomfortable for people to understand how much of an idea money is but that’s the reality we’re all living in in the modern economy.”

To the surprise of many, Neil also explains where modern central banking draws much of its inspiration. Although the actions of central banks are often associated to the prominent economist John Maynard Keynes, Irwin says that one of the primary roles of the central bank—to act as a lender of last resort—is found historically in the template created by the Bank of England in 1866 in order to prevent the failing of the British economy.

One of the main differences between now and then, however, is the cost of money. Whereas the Bank of England charged a penalty rate of interest to discourage borrowing without precaution, today’s central banks lend money without cost, restriction, or physical limitation.

Thus, Irwin explains, starting in 2008 the “lender of last resort function was taken to a new extreme by all major central banks... [buying] all this stuff outside of what you’d normally expect a central bank or the Federal Reserve to do.”  

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