Tags: central bank | stimulus | QE | economy

Central Bankers Can't Fix Europe

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Thursday, 29 Jan 2015 08:05 AM Current | Bio | Archive

Quantitative easing (QE) is the drug of choice for central bankers in the 2010s. It's become all the rage.

Last week, the European Central Bank (ECB) joined the U.S. Federal Reserve, the Bank of England and the Bank of Japan by launching its own massive bond-buying (money-printing) program. The 19-member union is the latest major economy to embrace this popular form of Obama-era monetary trick.

Europe is teetering on the brink of recession, again. The new program is the most aggressive effort yet to revive the region's sputtering economy. It entails the purchase of 60 billion euros ($70 billion) of bonds and debt securities per month. Purchases will start in March and continue through September of 2016, or longer if necessary.

It has long been anticipated that the ECB would do this. Short-term market traders delight in the fact that the action will likely spur some confidence and help support the stock market — for now. But aside from creating the false illusion that Europe's economic problems are getting fixed, the program will likely accomplish little else.

The idea behind printing money to purchase financial assets is to reduce interest rates and increase the availability of money. It is hoped that cheap and plentiful loans will encourage borrowing and economic activity. But rates are already dirt cheap in Europe and demand for loans is still anemic amidst the economic stagnation.

Solid fiscal reforms are the only thing that can right the euro ship. The region's problems can't be papered over with newly printed euros and still lower interest rates. These countries need to embrace truly pro-growth reforms like cutting taxes and rolling back stifling regulations and inefficient social programs.

Yet too many EU nations are still addicted to entitlement-state economics and are reluctant to employ meaningful reforms. All central bank stimulus can do is buy these countries some time to turn over a new leaf and change their long-entrenched policies that result in secular stagnation. But will they?

Excessive central bank stimulus is the result of poor leadership, largely on the part of the U.S. A less foreseen negative consequence of the massive Fed stimulus is that we have exported a lousy solution. Central bank stimulus is seen by many to have been successful in reviving the U.S. economy and other countries are following suit. But holding the U.S. as an example of QE success is a mistake.

The U.S. economy looks strong on a relative basis right now. But the economy has not grown stronger because of Fed stimulus. Sure, QE helped prop up stock prices by keeping rates on alternative investments ridiculously low, but it did little to lift the Main Street economy. The U.S. economy is performing because it is singularly magnificent and has more going for it than any other economy in the world. Europe won't duplicate U.S. success with QE.

As well, the jury is still out on QE. It remains to be seen if the Fed can stay off it and if other negative consequences will surface. All the money printing could cause severe inflation down the road or result in currency wars and protectionism. But that's still speculation at this point.

Here are two huge problems all this global money printing is already creating:

Lazy politicians. You can call the political class a lot of names. I'll just use one here — predictable. It's a safe bet that politicians won't do anything difficult until the pain endured from not making hard choices exceeds that from making them. Central bank stimulus makes it much easier for politicians not to make difficult reforms, so they don't.

Central bank actions are designed to buy time for politicians to right the fiscal ship in an emergency. But politicians have used central bank stimulus as a substitute for making tough choices. Crucial time is being squandered.

The tetracycline syndrome. Tetracycline is an antibiotic that was commonly used to help clear up acne. Dermatologists often recommended it to kids with bad acne problems back in the day. But most doctors cautioned not to rely on the drug and only use it temporary to clear up a particularly bad breakout.

The reason for the caution is that if the antibiotic is taken regularly the body will build up immunity to it. Then, if a kid gets truly sick, this crucial drug would be ineffective. And that could be a big problem. It would be highly inadvisable for a kid to indulge in bacon and chocolate and skip the smelly face wash because the tetracycline will fix everything.

But that is in effect exactly what the world is doing with central bank stimulus. These measures are supposed to be employed temporarily in a financial emergency. But politicians are relying on them as a permanent substitute for making hard choices. When economies get truly sick, the central bank medicine will be ineffective. At the same time, politicians' competency in implementing fiscal reforms will have atrophied.

Monetary stimulus may be popular now and it may help prop up the market. But it is setting us up for big trouble when the next recession hits.

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TomHutchinson
Quantitative easing (QE) is the drug of choice for central bankers in the 2010s. It's become all the rage.
central bank, stimulus, QE, economy
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2015-05-29
Thursday, 29 Jan 2015 08:05 AM
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