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ECB Continues Cheap Money Policies

Posted by Steve Markowitz on April 22, 2016

The Wall Street Journal reported that the European Central Bank (ECB) intends to continue with its loose monetary policies.  ECB President Mario Draghi held a news conference this week and stated that the Bank intends to continue to do whatever is necessary to fight deflation, including more interest rate cuts.  This followed the ECB’s decision last month to again cut interest rates and increase its bond purchases.

To put the ECB policies in context, the current ECB base interest rate is 0% with depositors actually paying 0.4% to keep money in banks.  This is a radical effort that continues central bank policies to stimulate the economy.  However, the policies have failed to promote growth.  In fact, there is a growing school of thought that the policies themselves have constrained growth due to the imbalances created.

The fact that central bank stimulative efforts have not worked have not curbed banker enthusiasm for more of the same.  For eight years artificially low interest rates have been the backbone of central bank policy.  After it becomes apparent that the policies did not work, bankers respond by calling for more of the same.  Wow, speaking of insanity!

At the news conference Draghi was questioned about even more radical future steps such as “helicopter money”.  With this approach, the nuclear option indeed, central banks basically hand out money to consumers to fight deflation, i.e. create inflation.  Draghi’s response was that the ECB has not officially discussed at the tactic.  Translation of central banker doubletalk: the approach is being considered.

The ECB has placed itself in a precarious position.  After the 2008 meltdown the Bank was determined to fix the economy with easy money policies.  Not only did the policies not stimulate the economy, they hindered economic correction and growth.  A problem created by excessive debt and loose money cannot be repaired by more the same.  The central bank efforts merely moved what was excessive private debt to the public sector.  In addition, cheap money allowed debt to once again grow in the private sector.  Finally, too many commercial banks and corporations have been allowed to continue operations only because of access to cheap financing, so-called zombie corporations.

The anemic economic growth of recent years has been artificially created by low interest rates.  The low rates only temporarily propped up growth, requiring still further interest rate cuts, each with diminishing benefit.  While the ECB understands the conundrum it is in, it fears the result of change back to more normal monetary policy.  Therefore, it continues down the path of still more radical monetary interventions, a downward spiral.  Given this, “helicopter money” seems inevitable.  Significant inflation will not be far behind.

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