This spring I read a comment with the title “Endless Insanity” in my longtime favorite Swiss newspaper, the liberal monument „Neue Zürcher Zeitung“ (founded 1780). The article commented on the current state of the world with global economies growing subpar, but growing. This, in turn, leads global central banks to a never seen monetary easing of huge and unprecedented scale. I want to – again – pick up on that.
Well, I like the term “Central Bank Insanity” because it describes what is going on in financial markets. And it’s a global issue.
What we are witnessing is pure Central Bank Insanity. Why is that? Well, after the great financial crisis of 2008/2009 the global financial system got into deleveraging mode. Balance sheets needed to be deleveraged, debt was and is being repaid and we had a classical balanced sheet recession as it was first brought up scientifically by Richard Koo, economist at the Japanese Bank Nomura.
Central Bank Insanity is an issue that seriously bothers me because it is so obvious for all to see but nobody so far stood up and yelled: “Stop it!”. Because, as Charles Prince, ex CEO of Citibank nicely put it in 2007 – facing financial disaster – “as long as the music plays you have to dance.” A classical case of moral hazard behavior. Déjà vu. In 2007 many pundits knew that the great subprime crisis was about to unfold. But they nevertheless were still dancing, because they were dancing close to the safety boats of the “Titanic” that everybody knew they were on.
The current monetary easing does not have a direct effect on global growth. As long as the monetary multiplier remains stalled the economy is not going to grow just because Draghi, Yellen and Co. keep the money gates open wide. By keeping the monetary easing running they are signaling to the world that we are still in crisis mode – 6 years after the subprime crisis and with growth remaining positive, but weak. At least compared to the rates seen until 2007, which, in turn, were simply artificially fueled by massive debt. The only effect the easing shows is the bubbling of the bond markets and partly the stock markets. A second effect is currency devaluations leading to improved exporting conditions in certain countries. Besides that, the central banks are just piling up a huge inflationary potential.
What ought to be done? First of all, central banks fighting every little sign of economic weakness with more easing lead to an effeminacy of the global economy. Like mommy always jumping up when little John is mourning the global economy and especially the global financial markets get addicted to the drug called “monetary easing”. The system looses internal strength. This development is fatal. It produces bubbles and keeps healthy, structural adjustments in the economy from happening. The central banks ought to finally stop their insane policies and allow the global economy to get into a natural equilibrium again. This does of course not come without pain, unemployment and the like. But if we want leave our children a normal world the central banks need to shift gears now. To reverse! Otherwise we will be damned for a vicious circle of endless debt, negative interest (a one-of-a-kind perversion) and moral hazard. Somebody has to pay the bills. And it would be very unfair to leave them to the next generation.
Who is going to stop the central bankers around the world? What is it that drives them? We need to turn of the music now. Slowly, but surely.