ECB decision: Unnecessary, ineffective but further entrenching bad habits

Euro banknotes

After months of whinging and whining by the international commentariat, and of relentlessly redefining what any sensible person would call “price stability” as a grave economic problem, the ECB has caved in, as expected, and yesterday announced further stimulus measures. Unnecessary I have pointed out repeatedly that low inflation is not a problem, and that the slow growth in money and credit that is presently its cause, is understandable and not entirely unhealthy. In many parts of the eurozone households, … [Read more...]

ECB under pressure to abandon superior policy stance

Balls of euro banknotes

The European Central Bank is under pressure. Inflation in the eurozone is at 0.7 percent but as Ben Bernanke supposedly stated, we are never sure if we measure these things correctly. So by all we know, the eurozone may already be in mild deflation. This should come as no surprise. The eurozone has practically had zero money growth and zero growth in lending for some time. As reported today, growth in the M3 money aggregate fell to a snail’s pace of 0.8 percent year-over-year in April. Loans to the private sector are 1.8 … [Read more...]

Keynesian madness: central banks waging war on price stability, savers

Eurotower In Frankfurt

There is apparently a new economic danger out there. It is called “very low inflation” and the eurozone is evidently at great risk of succumbing to this menace. “A long period of low inflation – or outright deflation, when prices fall persistently – alarms central bankers”, explains The Wall Street Journal, “because it [low inflation, DS] can cripple growth and make it harder for governments, businesses and consumers to service their debts.” Official inflation readings at the ECB are at 0.7 percent, still positive so no … [Read more...]

No end to central bank meddling as ECB embraces ‘quantitative easing’, faulty logic

Mario Draghi, ECB (photo by IMF/Stephen Jaffe)

“Who can print money, will print money” is how my friend Patrick Barron put it succinctly the other day. This adage is worth remembering particularly for those periods when central bankers occasionally take the foot off the gas, either because they genuinely believe they solved the problem, or because they want to make a show of appearing careful and measured. The US Federal Reserve is a case in point. Last year the Fed announced that it was beginning to ‘taper’, that is, carefully reduce its debt monetization program … [Read more...]

Janet Yellen’s game of Jenga

Jenga tower

Janet Yellen has a plan. The plan is to exit the ultra-loose policy of the Federal Reserve, and to do so very slowly and very carefully. And by slowly I mean very slowly. 2013, the last year of the Bernanke reign and the sixth year post subprime, was the central bank’s most generous if measured by level of interest rates and the expansion of the girth of its balance sheet: Fed Funds remained at 0.25 percent throughout the year, and through quantitative easing the monetary base grew by another $1,000 billion. Such largesse … [Read more...]

Forward Guidance? – Nonsense! Central bankers have no choice.

"Pioneer of guidance" Mark Carney

After two decades of serial bubble-blowing, the world’s central bankers have maneuvered themselves into a corner. They created a monster in the form of an unbalanced global economy and a bloated financial system, laden with debt, addicted to cheap money, and in need of constantly rising asset prices. Now the monster is in charge and the central bankers dare not stop feeding it. The US Fed did, of course, make some noises to the effect that the flow of cheap money may at some point slow and then even stop. How credible these … [Read more...]

End of QE? – I don’t buy it.

Ben Bernanke

A new meme is spreading in financial markets: The Fed is about to turn off the monetary spigot. US Printmaster General Ben Bernanke announced that he might start reducing the monthly debt monetization program, called ‘quantitative easing’ (QE), as early as the autumn of 2013, and maybe stop it entirely by the middle of next year. He reassured markets that the Fed would keep the key policy rate (the Fed Funds rate) at near zero all the way into 2015. Still, the end of QE is seen as the beginning of the end of super-easy … [Read more...]

Roubini attacks the gold bugs

Nouriel Roubini

Earlier this month, in an article for “Project Syndicate” famous American economist Nouriel Roubini joined the chorus of those who declare that the multi-year run up in the gold price was just an almighty bubble, that that bubble has now popped and that it will continue to deflate. Gold is now in a bear market, a multi-year bear market, and Roubini gives six reasons (he himself helpfully counts them down for us) for why gold is a bad investment. Roubini does not quite go so far as to tell his readers that there is no role … [Read more...]

Are central bankers losing control?

money symbols getting sucked into a vortex

The last couple of weeks have been very interesting. Remember that, certain regional differences aside, Japan has, for the past two-plus decades, been the global trendsetter in terms of macroeconomic deterioration and monetary policy. It was the first to have a major housing and banking bubble, the first to see that bubble burst, to respond with years of 1 percent interest rates, then zero rates, then various rounds of quantitative easing. The West has been following Japan each step on the way – usually with a lag of about … [Read more...]

Is present monetary policy rational?

dollar notes falling from sky

While the stance of monetary policy around the world has, on any conceivable measure, been extreme, by which I mean unprecedentedly accommodative, the question of whether such a policy is indeed sensible and rationale has not been asked much of late. By rational I simply mean the following: Is this policy likely to deliver what it is supposed to deliver? And if it does fall short of its official aim, then can we at least state with some certainty that whatever it delivers in benefits is not outweighed by its costs? I think … [Read more...]