Despite the advent of the tablet phone and microwave kettle corn, there are still rudimentary evolutionary responses hardwired into the core of the human psyche. During moments of failing they take over and suppress clear thinking. How else can one explain modern man’s continued imbecilities?
Perhaps at another time and another place this animal instinct served a valuable purpose. The luxury of thoughtful contemplation wasn’t always an option. When backed into a corner just a moment of hesitation could mean the difference between life and death.
These days this archaic trait can become a great liability when put to the test. For instance, rather than slamming on the brakes to prevent a bus from driving off the cliff, a driver will often do the opposite…they’ll accelerate.
Several months ago the European Central Bank (ECB) initiated a new mass money debasement scheme. It involved buying €60 billion ($66 billion) a month of European government bonds. Somehow this was supposed to improve the economy.
No one, as far as we can tell, has convincingly explained how creating money from nothing and loaning it to European governments will induce robust economic growth. But most people never stop to contemplate it to begin with. Those who do – that’s us, including you – wear tinfoil hats.
Accelerating Toward Disaster
At the time the bond buying program was initiated, ECB President Mario Draghi called it the “final set of measures” needed to improve the business environment in Europe. Here at the Economic Prism, we called it the beginning of the end of the European Union.
The basis of our assertion was purely empirical. We’ve watched central bankers. We’ve observed their actions.
We’ve also seen a great disparity between what central bankers say and what they do. For when the quantitative easing genie is let out of the bottle, it’s remarkably difficult to contain it again. The economy and the financial system quickly adjust to the abundance of cheap credit.
Soon everything and everyone is dependent upon it. More and more digital monetary credits become necessary each month just to stand still. Take away the cheap credit for just a moment and everything slumps over like a sack of potatoes.
The experience of the Federal Reserve, the Bank of China, and the Bank of Japan, is that it is much easier to start quantitative easing than it is to end it. “So what Draghi believes are a ‘final set of measures,’” we noted, “will ultimately be the beginning of a long term, long ranging asset purchase program that will end in disaster.”
Alas, this week brought forth new evidence that the ECB is accelerating its drive toward disaster…
“The European Central Bank will step up bond purchases under its €1.1 trillion ($1.245 trillion) program in coming weeks ahead of an expected summer lull in markets, a top ECB official said. The move reaffirms the bank’s resolve in meeting its stimulus goals while at the same time highlighting the dependence of investors on any hints from the world’s central bankers.
“The comments by ECB executive board member Benoît Coeuré sparked a rally Tuesday in European stock and bond markets and weakened the euro as investors were reassured that officials will take whatever steps are needed to meet their monthly bond-purchase target of €60 billion.
“The reaction also underscored the dominant role central banks are playing in the economy and financial markets years after the global financial crisis in 2008. Despite years of economic recovery, albeit modest and uneven in many parts of the world, investors still hang on the words of central bankers for direction.”
Conceivably, this is because central bankers have hijacked normal market relationships with their heavy handed intervention into credit markets. Feedback loops have been broken. Investors have nowhere else to turn. Of course, the longer this goes on, the greater the ultimate fallout will be.
“The purchase program will continue until the end of September 2016 and beyond if we do not see a sustained adjustment in the path of inflation,” said Bank of France Governor Christian Noyer, who is also on the ECB governing council.
Naturally, Mr. Noyer’s thinking is trapped by early man’s instincts. He’s stuck somewhere between a monkey and a caveman. He has no choice. All he can do is accelerate the bus as it drives off the cliff.
for Economic Prism