President Barack Obama’s former Chief of Staff Rahm Emmanuel once famously said, never let a crisis go to waste. And following the referendum vote by the British people to leave the European Union in the coming months, the European Central Bank (ECB) head Mario Draghi is channeling his inner Rahm Emmanuel to use this event as a clarion call to bring all global central banks under one roof to create one massive financial institution for monetary policy.
On June 30, global bond markets began to crash following the Brexit vote and news that one or more Italian banks would be requiring a bailout or bail-in. And on that day, Draghi was speaking at a European Central Bank conference in Portugal where he suggested that all central banks should join together in creating singular monetary policies, and no longer have ‘disjointed’ ones that work against each other in their respective regions.
Yet just as interesting as Mario Draghi’s call was for a centralized global central bank following the repercussions of Brexit took place, his idea is not isolated either as one day later the President of the Dallas Federal Reserve intimated as well that central banks, including the Fed, need to take into consideration global events when implementing U.S. monetary policies.
Fundamentally, the Federal Reserve has always had to take global monetary and financial events into consideration since 1946 when they took control over the reserve currency system. But most ironically, it has been other nations and central banks who have had to react to the fiscally irresponsible policies by the Fed rather than the other way around, especially during the late 60’s and early 1970’s when the U.S. devalued the dollar and took the world off the gold standard.
Perhaps Mario Draghi has forgotten 2008 and 2010 when the Fed used their power to manipulate swap line interest rates as a means to help bail out the European banking system when it succumbed to a liquidity crisis during the start of the Great Recession. And of course, the ECB is already part of a financial coalition known as the Troika, that uses the IMF in its own policies when dealing with debt problems within the EU sphere.
Using the UK’s Brexit as a means to call for a consolidation of global central banks under one umbrella is a last act of desperation, especially as sovereign countries dump Euros and British Pounds to rush into dollars as seen recently by the collapse in yields for the U.S. Treasury. But these actions are not from some mystical black swan event that has suddenly overwhelmed the ECB, but rather because European nations no longer can afford to follow Draghi’s mad science of negative interest rates and forced consumption to stave off deflation.
The solution to the coming monetary crisis is not another attempt to put a liquidity band-aid on the problem through schemes such as helicopter money, universal basic incomes for not working, and the banning of cash, but rather a complete overhaul of the system where the reserve currency is once again backed a precious metal such as gold, and individual central bank policies deal with individual sovereign monetary issues. Because if there is one thing that the leading central banks in Europe, Japan, Britain, and the U.S. have proved, their individual monetary programs have been enough to destroy their own financial systems, and the world doesn’t need them acting in singular concert to destroy the entire global system as well.