Is the present monetarian policy rational?

[Skybird]

Voices become louder in Europe that demand the ECB and the states going to negative interest policies. Not only would this allow to eat public debts by legally stealing from those having money to carry to the banks (or they don't, then it still gets eaten by inflation), but one talks of the need to have more "stimuli" in form of more money injected into the economy, and this money has to be generated somehow - so its either the money printer (which even the unscrupulous FED recently has indicated to wish to move away from), or taxes, robbery and "negative interests".

The author of this article asks whether present monetary policy is really rational.

LINK

We have now had almost five years of near-zero interest rates around the world. If such low interest rates were indeed the required kick-starter for the economy, we should have seen the results by now. ‘Stimulus’ is something that incites or arouses to action, a kind of ‘ignition’ that sets off processes, in this case, one assumes, a self-sustained economic recovery. But if the world economy was really fundamentally healthy and only in need of a dose of caffeine to stir it back into action, then dropping rates from around 4 to 5 percent to zero, as happened already 4 or 5 years ago, should have done the trick by now.
(...)
Still, many argue that the roughly 2 percent growth that the US economy may achieve this year is nothing to be sniffed at. Yet, for a $15 trillion dollar economy that is just $300 billion in new goods and services. In the first quarter of 2013, the Fed expanded the monetary base by $300 billion alone, and the central bank is on course for $1 trillion in new money by Christmas, while the federal government will run a close to $1 trillion deficit despite the ‘sequester’. That is very little growth ‘bang’ for a lot of stimulus ‘buck’. Self-sustained looks different.

Last week in the Euro-Zone, the ECB cut its repo rate to 0.5%, a record low. If suppressing interest rates from 3.75% in 2007 to 0.75% by 2012, has not lead to a meaningful, let alone self-sustaining recovery, or at a minimum the type of underachieving recovery that would at least allow the ECB to sit tight and wait a bit, what will another drop to 0.5% achieve?
(...)
By suppressing market yields and boosting the prices of financial assets this policy has delivered substantial windfall profits for owners of stocks, bonds, and real estate. Those who did, for example, speculate heavily on rising property prices in the run-up to the recent crisis, then were put through the wringer by the financial meltdown, now find themselves happily resurrected and restored to their previous wealth, if not more wealth, courtesy of central bank charity.

The 0.25% rate cut from the ECB may not lift many young Spaniards into employment but it surely makes ‘owning’ financial assets on credit cheaper. For every €1 billion of assets the rate cut means a €2.5 million saving per year in cost of carry, as duly noted by the big banks, ‘investment’ banks and hedge funds. After the ECB rate cut, German Bunds reached new all-time highs as did, a few days later, Germany’s main stock index.

That we are witnessing strange and dangerous deformations of the capitalist system, if we can still even call it capitalist, and that new bubbles are being blown everywhere, is not only evident by the increasingly grotesque dichotomy between a woefully underperforming real economy perennially teetering on the brink of renewed recession and a financial system, in which almost every sector is trading at record levels, but also by the fact that the high correlation among asset classes on the way up to new records is beginning to strain the minds of the economists to come up with at least marginally plausible fundamental justifications for such uniform asset inflation. ‘Safe haven’ government bonds that would usually prosper at times of economic pain are equally ‘bid only’ as are risky equities and the grottiest of high yield bonds. The common denominator is, of course, cheap money. And if cheap money for the foreseeable future is not enough, then how about cheaper money – forever?

This will end badly.

It indeed will. From nothing comes nothing, and even in the most beautiful of gardens there are no fairies living. So what use is there in hoping for fairies fixing the ugly scrapyard of ours? Even more so when we never would intend to pay them wages or say "Thanks", wouldn't we?

[the_tyrant]

I actually ran into a protest in Madrid yesterday.

It was a mix of anti euro people, anti government, anti US/UK/France/Germany etc. people and a healthy smattering of nut jobs.

There was this protester that was handing out English fliers on why his favorite candidate has a better fiscal policy than the incumbent. And when I saw your post, it hit me, there is arguably no politician with a sensible fiscal policy right now.

Ok, everyone who has read an introductory economics textbook will understand the concept of the business cycle. Sometimes the economy is doing good, and sometimes it simply isn't doing good. It is a fundamental fact of life, and is completely unavoidable.

Yet, the politicians all talk about a slight decline as if it is the end of the world. Well of course it is! With all their deficits and borrowing, they must have the economy grow or else they are in serious trouble.


Why these politicians can't learn to save money and not spend "paycheck to paycheck" is beyond me.

[Jimbuna]

I doubt we will ever come to a consensus of equilibrium.

It was a mix of anti euro people, anti government, anti US/UK/France/Germany etc. people and a healthy smattering of nut jobs.

Sounds like a typical protest anywhere.

[Skybird]

Originally Posted by the_tyrant

I actually ran into a protest in Madrid yesterday.

It was a mix of anti euro people, anti government, anti US/UK/France/Germany etc. people and a healthy smattering of nut jobs.

Why against France...? France is Spain's, Italy's and Greece's best friend against the German Nazi paymasters.