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
President Barack Obama often touts his administration’s achievements relating to the economy. Often the President uses the decreasing unemployment figure and the strength of the equities’ markets as proof statements. Both are red herrings.
The unemployment figures are ginned-up by the government to back a chosen narrative. In recent years of this rate has been reduced mainly by Americans dropping out of the workforce and therefore not counted as unemployed. In addition, Americans have been forced to take less than full-time work.
As stock prices have shown in recent weeks, what goes up will come down. The Dow Jones Industrial Average is down this year by 1,800 points or approximately 10%. This significant drop has occurred even though the Federal Reserve has maintained historically low interest rates for nearly 8 years.
The Federal Reserve today released a statement indicating that it too was concerned with the direction of the economy. In a statement released today, the Fed said: “The [Fed] is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” This typical Fed gibberish that in simple English means the economy is shaky.
The Federal Reserve’s near zero interest rate policies created an economy that is out of balance. Cheap interest rates have not fueled real economic growth, but instead created financial bubbles, as exemplified by equity valuations. This has placed the Fed in a quandary. If the economy weakens, the Federal Reserve will either have to allow the forces of supply and demand to correct the imbalances; i.e. a significant recession, or use even more radical easy money policies to keep the party going. Realistically, the only ammo left in the Fed’s arsenal is negative interest rates. The implications of banks requiring payments from depositors for savings deposits are hard to imagine.
The Wall Street Journal reported on Australia’s central bank cutting its benchmark interest rate from 2.25% to a record low of 2.0%. The bank justified the cut due to a weakened Australian economy, the result of decreasing demand and prices for its commodities, such as iron-ore.
The Australian central bank has announced that it hopes the lower interest rates will increase economic activity in other Australian industries, such as construction. However, it is likely that Australia is also seeking to decrease the value of its currency to make its products more competitive in the world market. This might be a viable strategy except that other countries are also debasing their currencies through low interest rate policies.
It has been about eight years since the 2008 financial crisis that led to the worldwide economic recession that is ongoing. Since then governments and central banks have used record deficit spending and low interest rate policies in an attempt to invigorate economic growth. History has shown such policies to be a failure. Not only has economic growth been anemic, but the gap between rich and poor has increased with economic policies that mainly benefit the wealthy who own equities whose values have been inflated.
The Australian rate cut will likely not be its last. It will also be joined by rate cuts in other countries, as each tries to gain advantage in the ongoing currency war. This story has played out throughout history and it is outcome has not been positive.