Saturday, March 12, 2016

The Emporer Has No Clothes

For the umpteenth time, Mario Draghi, president of the European Central Bank (the ECB) has thrown more money at Europe's stagnation problems and pushed central bank lending rates further in the negative direction.  Here's the latest assessment in today's NYTimes:

"For years, new rounds of Q.E. and other moves have been the inevitable response to periods of market tumult and economic weakness. Now markets fear that the central banks just have nothing left to combat global deflationary forces that have seemed more powerful with every tick down in the price of oil."

The truth is the central banks are largely irrelevant to what ails Europe as the Fed is largely irrelevant to what ails the US.  The problems that beset Europe and the US have nothing to do with monetary policy and cannot be addressed by monetary policy.  Monetary policy has never, ever had the ability to overcome economic stagnation.  Even Lord Keynes admitted this, famously, in his reference to the "liquidity trap."

If you punish entrepreneurs and business enough, you can shut down economic growth.  That's what both Europe and the US have done and plan to do more of.  Forget central bank policy.  They are totally irrelevant as a growing number of pundits are beginning, grudgingly, to realize.

You will note in the quote above the reference to "deflationary forces."  Deflation can be a good thing, especially if it is anticipated and is more or less constant.  Deflation and/or inflation are only worrisome when they are not anticipated, which is not the case in the current environment.

Deflation is not the problem.  The problem is economic stagnation brought on by over-regulation of economic activity.

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