ECB Continues Cheap Money Policies

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. Continue reading

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What is Money?

For some years conservative economists have voiced opinions that the easy money policies of the Federal Reserve and the increasing deficit spending by the United States will damage the economy.  As the years pass and without clear connection between these policies and their costs or consequences, these calls have begun to sound more like the girl that cried wolf.  However, unless one believes in perpetual motion or alchemy, there must be costs to policies that in essence print money.

Forbes Editor-in-Chief Steve Forbes has said of money:

Money is simply a tool that measures value, like a ruler measures length and a clock measures time.  Just as changing the number of inches in a foot will not increase the building of houses or anything else, lowering the value of money will not create more wealth.  The only way we will ever get a real recovery is through a return to trustworthy, sound money.  And the best way to achieve that is with a gold standard: a dollar linked to gold.  Continue reading

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