Not Quite Right in the Head?
The belief that the market economy requires “steering” by altruistic central bankers, who make decisions influencing the entire economy based on their personal epiphanies, has rarely been more pronounced than today. Most probably it has actually never been stronger. It is both highly amusing and disconcerting that so many economists who would probably almost to a man agree that it would be a very bad idea if the government were to e.g. take over the computer industry and begin designing PCs and smart phones by committee, think that government bureaucrats should determine the height of interest rates and the size of the money supply.
Photo credit: Michael Probst
We know of course that central banks are the major income source for many of today’s macro-economists, so it is in their own interest not to make any impolitic noises about these central planning institutions and their activities. Besides, most Western economists have not exactly covered themselves with glory back when the old Soviet Union still existed. Even in the late 1980s, Über-Keynesian Alan Blinder for instance still remarked that the question was not whether we should follow its example and adopt socialism, but rather how much of it we should adopt.
The recent ECB announcement detailing its new “QE” program once again confirms though that there is nothing even remotely “scientific” about what these planners are doing. Common sense doesn’t seem to play any discernible role either. Below are the 10-year government bond yields of Italy and Spain. These are actually among the higher bond yields in Europe right now.
Leaving for the moment aside how sensible it is for the bond yields of virtually insolvent governments mired in “debt trap” dynamics to trade at less than 1.3%, one must wonder: what can possibly be gained by pushing them even lower? Does this make any sense whatsoever?
Meanwhile, the ECB let it be known that it wouldn’t buy any bonds with a negative yield-to-maturity exceeding 20 basis points – the level its negative deposit rate currently inhabits as well. What a relief! What makes just as little sense is that the economic outlook presented by Mr. Draghi on occasion of his press conference was actually quite upbeat.
To summarize: yields are at record lows, with about €2 trillion in European government bonds sporting negative yields to maturity. The economic outlook is said to be good. The current slightly negative HICP rate is held to be a transitory phenomenon (it very likely will be). Needless to say, the arbitrary 2% target for “price inflation” makes absolutely no sense anyway. Not a single iota of wealth can be created by pushing prices up. Last but certainly not least, year-on-year money supply growth in the euro area has soared into double digits recently.
And the conclusion from all this is that the central bank needs to boost its balance sheet by €1 trillion with a massive debt monetization program? Are these people on drugs? If not, then they should perhaps see a shrink. Parhaps the cupboards of the monetary bureaucrats are short a few plates and in need of a little pharmacological fine-tuning. Just saying.
The ECB’s balance sheet remains below the levels of 2012 as banks have repaid LTRO funds. However, the central bank balance sheet doesn’t necessarily have to grow for the money supply to soar – there is only a very tenuous (or rather, non-existent) correlation between the money supply and bank reserves. Note that with required reserves in the euro area at a mere 1%, commercial banks could in theory lever up every euro they receive in deposits by a factor of 100 and it would be perfectly fine with the ECB (chart via the WSJ) – click to enlarge.
Let’s Do More of What Isn’t Working
As you can see above, the only datum that hasn’t yet attained the lofty heights of full Monty lunacy is the ECB’s own balance sheet – however, that has obviously not kept the banks from vastly expanding the amount of fiduciary media in the economy. The ECB’s upcoming intervention should result in an acceleration in euro area money supply growth, quite possibly pushing it to new record highs in terms of the yearly rate of change.
The WSJ has has also published a summary of European “growth” (this is to say, the change rate of GDP, which is generally referred to as growth, even though it tells us almost nothing about whether or not material prosperity is actually increasing) and “inflation” (not of the money supply, but depicting the change in consumer prices). What this chart shows is that unprecedented monetary pumping and ZIRP/NIRP have had none of the effects predicted by the central planners so far. Even if they had, it would be no reason to rejoice.
To briefly explain the dismissive remark above and the annotations we have added to this chart: it seems possible that measures of economic activity such as GDP growth will improve somewhat in light of the recent lift-off in money supply growth. However, this will only indicate that new capital malinvestment has been set into train. It should be obvious that society at large cannot possibly become any wealthier just because more money is about to be printed. If that were the case, the economies of Venezuela, Zimbabwe and Iran would be the envy of the world.
Moreover, if the ECB’s “inflation target” is reached (a target doesn’t make even the slightest economic sense), it will actually actually harm European consumers. Their incomes and savings will then decline in real terms, i.e., they will become even poorer. They are already losing big due to the recent enormous decline in the euro’s exchange value. As Ludwig von Mises noted with regard to the devaluation of exchange rates:
“The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation’s welfare.
In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.”
In short, the entire citizenry of the euro area has already become poorer due to the efforts of the ECB. The explicit goal of the central bank is now to make them even more so. What is the point of such a policy?
There is of course a point to this seeming lunacy: it is all done to support the profligate governments of Europe’s welfare states and keep the formation of the socialistic super-state in Europe on track. Whether this is seen as good or bad by the average citizen is not even up for debate: it is simply what the political and bureaucratic elites have long ago decided is good for the citizenry, since they think they know best. One might say that it is up to said citizens to elect someone who would do things differently, but that runs into the practical problem that many, even most, of the political groups offering an alternative are even bigger etatistes than the current elite. Whether they are of the socialist or the nationalist (more precisely, national socialist) variety matters little in this context. One would have to expect them to implement even more central economic planning.
The ECB may succeed in increasing economic activity and prices in Europe (especially the latter) by stepping up the pace of monetary pumping even more. However, this will not create any new wealth and will ultimately only sow the seeds of the next crisis. Since many economic regions in Europe are already very poor structural shape, it is also possible that that not even the illusion of economic growth can be created anymore. Bondholders should however be happy, as they can now unload the debt of governments that are up to their eyebrows in debt that will never be repaid in real terms on a buyer with unlimited buying power.
Charts by: BigCharts, ECB, WSJ