A carefully selected group of bureaucrats and technocrats sit in a meeting behind closed doors and decide what the interest rate in an economy should be.
The most important price in an economy (the price of money) is centrally-planned, controlled, and fixed by a handful of men and women. What could go wrong?
Not only do they get to control the price of money, but they also get to control the supply. They can decide to reduce supply at a certain point in time as well as increase it at certain times. What could go wrong?
Lately, they can also decide where the money goes: buy some toxic assets, market support to the housing sector, buy some Treasury bills, add junk bonds on the list, buy some equities, and buy gold. “Let's increase supply”, that's what they decide; print a trillion here to cover the government's budget deficit and another trillion there to cover commercial bank’s losses. What could go wrong?
The observation that central banking is essentially central planning is beyond dispute. That central planning is a core tenet of communism is also beyond dispute. The ideals of communism fail because the corruption starts at the top, where bureaucrats, central planners, and resource allocators reside. The failures of communism and communist-like type of institutions is well-documented.
What we have here is a communist-type of an institution existing at the heart of our capitalistic economy. What could go wrong? Plenty. The result set is always the same with communism; there is a poor and distorted allocation of resources. And that is precisely a point of failure.
Central Banking is a bug, not a feature of capitalism. It is a Single Point of Failure (SPOF). Central Banking is a communist trojan horse killing the capitalistic system.
The great wealth divide created and sustained by central banking is leading many people to claim that this version of capitalism has failed because the rich get richer whilst the poor get poorer.
What many do not know is that capitalism per se, has not failed, but it has been corrupted by a communist trojan horse called central banking. If you take the resource allocation power from central banks, pure capitalism will flourish, and the wealth divide will subside, the poor will also get richer by the day, whilst the rich don't get poorer, thus vastly improving everybody’s life whilst creating a sustainable stable civilization.
What is a Single Point of Failure? In systems analysis, a Single Point of Failure (SPOF) is a part of a system that, if it fails, will stop the entire system from working.
In a network of computers at your workplace, the server or the router is a single point of failure. If the server is down, employees cannot access certain services, software, and files hosted on the server. In short, the failure of the server brings your whole system down. Accounting cannot access their Sage Pastel software. Sales cannot access their booking/sales system. Production and Warehousing can't access their inventory system. HR cannot access its files stored on the server.
If your PC is down, but the server is up, there is no big problem. IT will ask you the standard question, “Have you tried to switch it on and off?”, and if that does not work, they take it to the IT department, fix what's broken and give it back to you. It's not a big deal. Your PC/laptop is a node. It doesn't affect the entire system if it's down. It's not our classical Single Point of Failure.
The analogy above can be extended to an economic system. Failures in some parts of the economy do not bring the entire economic system down. Those failures can be fixed, or they can be left unresolved. Life goes on.
Take Law for example. There are certain aspects of it that we don't like and can view as broken but don't really bother us enough. One such example is around billing incentives vis-a-vis efficiency.
Your lawyer is not incentivized to minimize or at least optimize the time spent on your case. It is not in his best interests to spend only the reasonable and necessary amount of time on your case. Hourly-billing, per-minute billing and per-second billing at high rates do the opposite. It can be argued that alongside winning your case, the lawyer is incentivized to maximize the billable time.
On that note, every second you take from a lawyer is billable, be it listening to you, talking to you, researching legal precedents of your case, replying to your email with two words “Acknowledging receipt”, among many other acts.
A consultation that can be effectively and efficiently done in an hour could be done in 3 hours. If the billing rate is high, your lawyer is not incentivized to be efficient time-wise. In this case, the statement that “time is money” takes a perverted meaning, one that does not involve saving time or making optimal use of time.
In fact, the more time is wasted, the more the lawyer gets rewarded. If a consultation could be done in an hour but took three hours, then the lawyer effectively got paid for 2 hours of doing nothing, which is a very high rate of return on the time and effort invested.
This is apparently a broken part of the system. But we don't really bother about it. It's an annoyance but it doesn't bring the legal fraternity nor capitalism down. At the end of the day, it goes down to what we believe and what we can live with.
We believe the more time a lawyer spends on our case, the higher the chances of winning in court are. The relationship between time spent on a case and the probability of winning might not be as linear as we think it is. It obviously runs into diseconomies of scale and the straight line turns into a downward-sloping curve. At the limits, the merits of the case do not change no matter how many hours your lawyer spends time on.
Another example is in the medical profession. There are numerous cases of medical professionals recommending the most expensive procedure instead of the most efficient or most applicable/relevant to the patient because they have incentives wrapped around the commission structure. It's a broken system.
There are plenty of examples in insurance as well. But in the grand scheme of things, these areas of our economy do a lot of good. The good overcome the bad and that's what matters. The bugs and flaws in those areas do not bring the entire system down. Whatever can go wrong in those sectors of the economy, do not bring the entire economic system down. At their worst, they could squeeze down those specific sectors but not the entire civilization.
Doctors and Lawyers are nodes similar to your PC or laptop. Bankers (especially central bankers) are the server. Whatever can go wrong in there can bring the entire system down. The key question with central banking is, what could go wrong? Think about it. Go do your homework.
Central Banking evolved as the need for centralizing things emerged, just like how we realized we needed a server in our computer networks. However, as time went by, we realized we could have better systems if we moved everything over to the cloud, which meant we can now work from anywhere and can access our services, software, and files from anywhere.
And then we realized later that we could actually do away with the server in the cloud, we could decentralize file storage, systems, and computing as long as we have lossless compression algorithms and peer-to-peer networks to transfer and store vast amounts of data (NB* still science-fiction, not yet a reality).
The same phenomenon is taking place in monetary systems that are at the center of our capitalistic economies. Decentralized monetary systems are emerging in order to avoid a centralized Single Point of Failure.