One of the big mistakes of economists is to receive measures from central banks as if they were the revealed truth.
It is surprising and worrying that it is considered obligatory to defend every action of central banks. This, of course, in public. In private, many colleagues shake their heads in disbelief at the accumulation of bubbles and imbalances. And, as so many times, the lack of constructive criticism leads to institutional complacency and a chain of mistakes that all citizens will later regret.
Support the status quo
Monetary policy in Europe has gone from being a tool to help states make structural reforms to an excuse do not to achieve them.
Steadily financing the deficits of countries that perpetuate structural imbalances has not helped bolster growth, as the eurozone has already seen steady reductions in GDP before the covid-19 crisis, but it whitewashes extreme populists. left who defend massive money printing and currency theory (MMT), threatening the progress and growth of the euro area. Populism is not fought by whitewashing it, and the medium and long term impact on the euro area of this misguided policy is unquestionably negative.
Today, many far-left European politicians are telling citizens that structural reforms and fiscal prudence are things that have been implemented by evil politicians with malicious intent, and the message that there is unlimited money for anything, when and how is laundered by the central bank shares.
It is surprising to hear some serious economists at the European Central Bank or the Federal Reserve say that they do not understand how the idea that money can be printed forever without risk is spreading in the political debate when it is the central banks themselves who provide this false sense of security. The central bank can hide the risk for a period of time, but does not eliminate it.
The problem of negative rates
Greece, Cyprus, Lithuania, Slovakia, Spain, Portugal and Slovenia are already borrowing at negative real rates. However, negative rates are not a sign of confidence in government policies, but a monetary policy aberration that hides the real risk. And sooner or later it breaks out.
When politicians say negative returns reflect the confidence of markets in the country, they are simply lying. The ECB is on track to hold 70% of the eurozone’s outstanding sovereign debt and is buying all issuance net after buybacks, according to Pictet and the Financial Times. There is no market.
This temporary confidence in the ability of the ECB to modify risk will only be maintained if the euro zone increases its trade surplus and its economic production, but especially if Germany continues to finance it. It is not eternal; it is not unlimited and it is certainly not without risk.
A decade of easy money
Many readers will say that this is an exceptional policy due to the covid-19 crisis which requires exceptional measures. There is only one problem with this argument: that it is false.
The ECB’s policy has been ultra-extended for more than ten years, in times of crisis, recovery, growth and stabilization. Interest rates were brought down to negative and asset purchases continued in periods of growth and stability when there was no liquidity risk in the economy.
In fact, the European Central Bank has become hostage to States which do not want to reduce their structural imbalances but aim to perpetuate them because the cost of debt is low and the ECB “supports” them. The ECB should be concerned that the more radical parties, many aligned with the economic policies of Argentina and Venezuela, like Podemos or Syriza, are applauding this monetary madness as a validation of their theories.
It is no coincidence that the reformist dynamic in the euro zone has abruptly stopped since 2014. It coincides exactly with the massive injections of liquidity. Structural reforms and fiscal prudence are seen as bad policies. Low rates and high liquidity have never been an incentive to reduce imbalances, but rather a clear incentive to increase debt.
The big problem is obvious. Once in place, the so-called expansionary monetary policy cannot be stopped. Does anyone at the ECB think that states with a structural deficit greater than 4% of GDP per year will eliminate it when they issue debt at negative rates? Does anyone at the ECB honestly think that after the covid-19 crisis governments will cut bloated budgets? Dozens of excuses will be invented to perpetuate a fiscal and monetary policy, the results of which are disappointing to say the least given the enormous volume of resources used.
The worst excuse of all is that “there is no inflation”. It’s like driving a car at 300 miles an hour on the highway, looking in the rearview mirror and saying, “We haven’t killed each other yet, just step up.
Asset price inflation
It is not surprising that the euro area has witnessed a growing number of protests against the rising cost of living as the central bank tells us that “there is no inflation”, but it is also, at least, unwise to say that there is There is no inflation without taking into account the financial assets that have exploded as a result of this policy.
Insolvent countries with negative yielding ten-year sovereign bonds represent huge inflation. Rising prices for non-repeatable goods and services, which in many cases triple the official rate of inflation, are huge inflation. The sharp increases in rents and housing are not sufficiently reflected in official inflation. This is particularly worrying when monetary policy encourages unproductive spending and perpetuates overcapacity. This means lower productivity growth, which means lower real wages in the future.
A recent study by Alberto Cavallo of the Harvard Business School warns of the differential between real inflation experienced by consumers, especially the poorest, and the official CPI (consumer price index). Take, for example, the euro area CPI for November. The figure is –0.3 percent. There is no inflation, right? However, in the same data, fresh food increased 4.3%, services 0.6%, and the energy component fell 8.3%, but no European citizen saw a decrease of 8, 3% on its energy bill, because neither gasoline, nor natural gas, nor electricity (taxes included) have fallen so much.
In fact, if we analyze the cost of living using the goods and services that we really use frequently, we realize that in an unprecedented crisis like that of 2020, prices for the middle class and the poorest strata. increase much faster than the CPI shows. , and this, added to the distorting factor of the enormous inflation of financial assets, generates enormous social problems.
Ignore the risk
The fact that, for now, huge risks are not being seen – or not seen by central bank leaders – does not mean that they are not being built. Negative-yielding debt, which hit a record $ 18 trillion globally, led by the eurozone and Japan, is not a sign of confidence, but rather a huge risk of secular stagnation.
When central bank leaders claim that they are only offering one tool, but at the same time giving fiscal and fiscal policy recommendations encouraging “not to fear debt” and to spend a lot more, no only the central bank loses its independence in the medium term, but it’s the same as a waiter who keeps serving you drinks, encourages you to frenzy and then becomes indignant that you are drunk.
The introduction of these huge imbalances comes with significant risks, and these are not my speculations about the future. These are realities today. The huge disconnect between financial assets and the real economy, with insolvent states financing themselves at negative rates, bubbles in real estate and infrastructure assets, zombie corporate debt or junk debt with historically low returns, the aggressively increasing leveraged investments in high-risk sectors, perpetuating overcapacity, etc. Ignoring all these factors in a monetary institution is more than dangerous, it is irresponsible.
It is not time to do everything at all costs no matter what. It is time to stand up for sane money or the credibility of institutions will sink even further as the chorus of general consensus sings hallelujah as the building crumbles.
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