I always thought that Mario Draghi was a complete dunce on fundamental economics, but he has now sealed the case in his own words. The reason the ECB is about ready to unleash its own version of QE, it seems, is that “moar inflation” would facilitate a creeping default on euroland’s massive public and private debts—-an albatross that ranges from 350% to 500% of GDP for most of its member states:
“…(growth is constrained by) a debt level, which, both for the private and public sectors, is still elevated. And with low inflation, the real value of this debt does not go down as fast as it would if inflation were higher, so it makes the adjustment of the debtors, the deleveraging, more difficult.”
Historically, such primitive inflationism was the province of cranks and demagogues. From the pages of American economic history the likes of William Jennings Bryan, Father Coughlin and Huey Long come to mind.
But now such tommyrot is spoken out loud by the head of the ECB and self-evidently embraced by the Fed, the BOE, the BOJ and most of the other major central banks. This would be dangerous enough in the world of 25 years ago where central bankers had enormous sway, but had not yet extinguished all semblance of independence and honest price discovery in financial markets. After all, the “bond vigilante’s” of the early 1990s were not exactly compliasant tools of central bank policy.
But in a world where money markets and capital markets have become totally drugged, house-trained and subordinated to central bank policy the official embrace of such rank inflationism is down right alarming. To my knowledge, such incendiary words have not been uttered aloud by any important central banker in modern times.
So give Mario Draghi the Rudolf Havenstein Award for being the most destructive central banker since its namesake. And add a poke in the eye to the fast money traders who have piled on to Draghi’s “whatever it takes” ukase, and created the economically absurd graph shown below.