In today’s fast-paced world, fundamental impulses rooted in our evolutionary past can still influence human behavior. Despite technological advancements, these primal instincts often emerge during challenging moments, clouding our judgment. This raises the question: how can we make sense of modern humanity’s ongoing follies?
Historically, these instincts may have been essential for survival. In dire situations, hesitation could be the difference between life and death. However, in contemporary contexts, such instincts can lead to poor decisions. Consider how a driver, instead of hitting the brakes to avert disaster, might instinctively accelerate instead.
A few months ago, the European Central Bank (ECB) launched an extensive monetary strategy, purchasing €60 billion ($66 billion) worth of European government bonds each month, with the hope of revitalizing the economy.
Surprisingly, no one has effectively articulated how generating money from thin air and lending it to European governments will foster significant economic growth. Yet, for many, pondering such matters doesn’t cross their minds. Those who do—a group that includes us—are often dismissed as conspiracy theorists.
Accelerating Toward Disaster
When the bond-buying initiative was introduced, ECB President Mario Draghi claimed it was the “final set of measures” needed to enhance Europe’s business landscape. At the Economic Prism, we contended it marked the beginning of the end of the European Union.
This assertion was based on observation. We have watched central banks in action and noted a significant disconnect between their words and their deeds. Once the quantitative easing genie is released, it’s nearly impossible to contain. The economy and financial systems adjust swiftly to the influx of cheap credit.
Before long, everything begins to rely on it. The demand for monetary credits escalates monthly just to maintain the status quo. Remove the cheap credit even momentarily, and the entire system collapses like a house of cards.
Evidence from the Federal Reserve, the Bank of China, and the Bank of Japan shows that initiating quantitative easing is far simpler than reversing it. Thus, what Draghi views as a “final set of measures” is likely just the onset of a protracted asset purchasing program that could lead to calamity.
This week revealed further evidence that the ECB is moving rapidly toward disaster…
Monkey Economics
According to a top ECB official, “The European Central Bank will increase bond purchases under its €1.1 trillion ($1.245 trillion) program in the coming weeks ahead of an expected summer market lull.” This move underscores the bank’s commitment to achieving its stimulus goals while revealing the market’s reliance on guidance from central bankers.
Benoît Coeuré, a member of the ECB’s executive board, noted that his comments spurred a rally in European stock and bond markets, weakening the euro as investors were reassured that officials would do whatever was necessary to meet the €60 billion monthly bond-purchase target.
This situation reflects the significant influence of central banks on the economy and financial markets, even years after the 2008 global financial crisis. Despite a modest and uneven economic recovery in some areas, investors remain reliant on central bankers for direction.
The prolonged intervention by central banks has disrupted normal market dynamics, creating broken feedback loops. Investors seem to have nowhere else to turn. As this situation persists, the implications could be severe.
Bank of France Governor Christian Noyer, also on the ECB governing council, stated, “The purchase program will continue until the end of September 2016 and beyond if we do not see a sustained adjustment in the path of inflation.”
Unfortunately, Noyer’s perspective appears constrained by primal instincts; somewhere between a monkey and a caveman, he finds himself helplessly accelerating the bus as it careens toward the edge.
Sincerely,
MN Gordon
for Economic Prism
