How to Defeat The Terminator

Pitiless, inhuman, relentless central banking...

SOME of THEM are the size of a man, others are as big as a planet. But the Terminator was not the first, writes Tim Price at Price Value Partners.

Long before Arnold Schwarzenegger's lethal cyborg monotoned "I'll be back," Fred Saberhagen's 'Berserker' series of short stories had already created a race of killer machines pursuing their own relentless logic: to destroy all living things.

The Berserkers, named after warriors from Norse mythology, are the ultimate doomsday weapons, intelligent machines constructed by a now long-dead race known as the Builders, to wipe out their rivals.

The Builders, and their enemy, the Red Race, vanished into history eons ago. But the Berserkers 'live' on, obeying their ruthless programming to extinguish anything that possesses organic life.

Like the Terminator, they can't be reasoned with, or bargained with. They do not feel pity, or remorse. Their sole purpose is to destroy.

Science fiction invariably sheds new light on what already exists. 'Berserker', like much science fiction, is an examination of unintended consequences. We create things with one specific objective in mind, but over time that objective subtly, and then dramatically, changes. (We'll discuss the risks posed by AI businesses to the financial markets – let alone humanity itself – in due course.)

Human institutions are like that. They may be founded with the best of intentions, but the road to hell, as we know, is paved with those intentions.

When central banks, for example, were first created, they arose out of a simple need: to raise finance for the governments they serve.

The Bank of England, for example, claims that its "mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability". But it was not set up to "promote the good of the people" nor is that either realistically or honestly its mandate today.

When it was established in 1694, the Bank of England was created explicitly to fund the government of the day, and that remains its primary role. The same holds for the Swedish National Bank, the Sveriges Riksbank, which was established in 1668 and which is the world's oldest central bank.

Over time, each central bank has typically been given control over the management of its state's currency, money supply and interest rates. In many cases, they have gone on to take a supervisory and regulatory role over the commercial banking system and acted, in times of crisis, as lender of last resort to troubled banks.

Both the Bank of England and the Swedish National Bank have, over the passage of time, ceded primacy in international monetary affairs to the US Federal Reserve, the Fed. Yet the Fed's conflicted origins are murkier than either of them. G.Edward Griffin, in his book The Creature from Jekyll Island, explains how the US Federal Reserve was conceived.

On a cold November night in 1910, a handful of financiers boarded a private railway car in conditions of extreme secrecy in New Jersey. The passengers included the Republican whip in the Senate and a business associate of the banker J.P.Morgan; the Assistant Secretary of the US Treasury; the president of the National City Bank of New York, the most powerful bank of the time; a senior partner of the J.P. Morgan Company; the head of J.P.Morgan's Bankers Trust Company; and a representative of the Rothschild banking dynasty in England and France.

In other words, of the six passengers, five of them were representatives of private banks. Those financiers would go on to meet in secret at a hideaway owned by J.P.Morgan and several of his business associates, where visitors would gather in the winter to hunt ducks. The name of this remote retreat: Jekyll Island. This group met in order to tackle five pressing issues:

• How to reverse the growing influence of small commercial banking rivals and concentrate financial power amongst themselves.
• How to allow the money supply to expand so that they could retake control of the industrial loan market.
• How to consolidate the modest reserves of the country's banks into one large reserve and standardise each bank's loan-to-deposit ratios, thus protecting themselves from the possibility of bank runs.
• How to shift any ultimate losses incurred by the banks onto taxpayers.
• How to convince the US government that the scheme was established to protect the public – as opposed to protecting the interests of a private banking cartel.

Perhaps most cynically of all, to address this fifth problem, the group decided to adopt the structure of a central bank and, furthermore, ditch the use of the word bank altogether, in favour of a coinage that would evoke the image of the federal government instead.

Three years later, after the passing of the resultant bill in Congress on 23 December, 1913, the US Federal Reserve was born.

"The Federal Reserve System," it today proudly tells us, "is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded."

Few could deny the latter point. Rather than maintain a narrow focus on managing the money supply, the Fed is now figuratively all over the shop, its fingerprints evident everywhere across the economy.

Financial historian and market analyst James Grant takes up the story:

"The Fed insists on saving us from 'everyday low prices' – they call it deflation. I submit that in a world of technological wonder, prices ought to be weakening: it costs less to buy things because it costs less to make them. This benign tendency the Fed resists at every turn.

"It wants the price level (as it defines it) to rise by two per cent a year, plus or minus [as does the Bank of England and the ECB]. In so doing, it creates redundant credit that finds its way into other things. These excess dollars do mischief. On Wall Street we call this mischief a bull market and we're generally all in favour of it.

"The Fed, in substance if not in name, is [still] engaged in a massive experiment in price control. They don't call it that, but they fix the Fed Funds rate, they manipulate the yield curve...they talk up the stock market. They have their fingers and their thumbs on the scale of finance. To change the metaphor, we all live to a degree in a valuation 'hall of mirrors'.

"There is no real suspense about how price control turns out. It turns out, invariably, badly."

Price controls always ultimately fail. You cannot fool the market forever. The only question is how long it takes for that failure to occur. It can take some time.

The great planned economy of the Soviet Union, for example, outlived an entire generation. Born in the chaos of the revolution of 1917, the Soviet Union persisted, despite itself, until the Berlin Wall finally came down in 1989. But price controls, and central economic planning, live on in the form of the modern central bank.

"Central bankers," writes James Rickards in The Death of Money: The coming collapse of the international monetary system, "control the price of money and therefore indirectly influence every market in the world. Given this immense power, the ideal central banker would be humble, cautious and deferential to market signals. Instead, modern central bankers are both bold and arrogant in their efforts to bend markets to their will.

"Top-down central planning, dictating resource allocation and industrial output based on supposedly superior knowledge of needs and wants, is an impulse that has infected political players throughout history. It is both ironic and tragic that Western central banks have embraced central planning with gusto in the early twenty-first century, not long after the Soviet Union and Communist China abandoned it in the late twentieth. The Soviet Union and Communist China engaged in extreme central planning over the world's two largest countries and one-third of the world's population for more than one hundred years combined. The result was a conspicuous and dismal failure.

"Today's central planners, especially the Federal Reserve, will encounter the same failure in time. The open issues are, when and at what cost to society?"

We are in the process of finding out.

"The Great Inflation, 1965-80, ruined lives, businesses, marriages, bond portfolios and central-banking reputations," writes Jim Grant. "What it did not threaten was the solvency of a relatively lightly leveraged nation.

"In 1981, the year when inflation gave way to disinflation, the funds rate peaked at 19.1%, the 30-year mortgage rate at 18.6% and the Moody's Baa corporate bond index at 17.1%. Debtors groaned and creditors exulted, but the banking system, the credit markets and the Treasury lived to tell the tale.

"No matter how today's macroeconomic tale unfolds, America will surely live to tell it. But as America is great, so are its debts.

"In 1980, total nonfinancial debt (corporate, household and all levels of government) registered at 136% of GDP. At year-end 2025, it registered at 257%.

"Today's main monetary fact is that inflation is accelerating in a setting of high financial leverage. Since the start of the war with Iran, Brent crude oil prices have jumped by 55% and urea fertilizer prices by 63%. In 1973, the OPEC oil embargo curtailed 6% of the world's oil supply; the closing of the Strait of Hormuz is curtailing 20% of the world's oil supply."

"The war is hitting the global economy in cumulative waves," says Indermit Gill, chief economist of the World Bank: "first through higher energy prices, then higher food prices and, finally, higher inflation."

Fight the berserker. Say no to high risk cash and high risk bonds and naked exposure to high risk fiat currency. Put your faith in something more tangible – real assets at fair prices. That includes high quality value stocks, and it includes the monetary metals, gold and silver, and related mining concerns, again at fair prices. Buy them now while you still can.