Central Bank Bazookas Can’t Help the Global Economy
Mario Draghi, as expected, didn't have whatever it takes.
Business Times reports:
The European Central Bank will gear up to buy Italian and Spanish bonds on the open market but would only act after euro zone governments have activated bailout funds to do the same, ECB President Mario Draghi said on Thursday.Draghi indicated that any ECB intervention would start at the earliest in September and would depend on countries in trouble on bond markets making a request and accepting strict conditions and supervision.
He also indicated that German central bank chief Jens Weidmann had expressed reservations about bond-buying and further efforts would be needed to persuade the Bundesbank before a final vote to take action.
And, as expected, investors were disappointed. Without Draghi's 'big bazooka' to give them hope, speculators dumped stocks and bonds. The Dow fell 92 points. Here's Bloomberg on what happened to bonds:
Spain's 10-year bond yield surged 43 basis points, or 0.43 percentage point, to 7.17 percent at 5 p.m. London time. The 5.85 percent bond due January 2022 tumbled 2.795, or 27.95 euros per 1,000-euro ($1,215) face amount, to 91.12.Similar-maturity Italian yields jumped 40 basis points to 6.33 percent. They earlier fell as much as 20 basis points.
The presumption is that the ECB could have whatever it takes if only the Germans would agree to give it to them. But that presumes the Germans have it. In other words, Europe's problem - it is widely believed - is a political problem. If only the Germans would get on board, all would be well.
The US, meanwhile, is thought to have whatever it takes already. It has no political problem, since it already has the full faith and credit of the United States government behind it.
Ben Bernanke decided to keep his big bazooka out of action. But as we saw, that bazooka only does one thing - it prints money. And if you could make people better off by printing money, the Zimbabweans would be the richest people on the planet.
More credit... and more cash... is not always 'whatever it takes'. Maybe it never is. Certainly not when the economy is already dripping with credit and drenched with debt.
Which brings us back to the question: whatever does it take to pull an economy out of a slump?
The answer cannot be given without understanding what causes the slump in the first place. Left to its own devices, an economy has its ups and downs. It breathes in. It breathes out. It has its mood swings and occasionally gets in a funk.
So far, there is nothing unusual about what has happened. After the extraordinary credit bubble - focused on the housing sector, especially in the US, Ireland, and Spain - now the economy is exhaling.
But it seems stuck... unable to inhale again. Jobs have been lost; they have not been recovered. Old businesses have failed. New businesses are not being started up. GDP growth has stalled. The eurozone and the UK are back in recession. Japan and the US are not far behind, while growth rates in Brazil, China and India are falling fast.
What can be done? Whatever does it take?
Let's first look at another reason why central banks' tricks don't work any longer.
"One of the reasons for the chronic recession and stagnation," Murray Rothbard wrote in the early '80s, "is that the market learns."
Then, markets had learned to expect consumer price inflation. So, when the central banks added more cash and credit, they simply boosted prices.
"Stagflation," they called it. Price increases without growth. Businesses did not expand; investors did not invest; lenders did not lend - they all anticipated higher prices, not an increase in real demand.
Markets needed to be taught a new lesson. Hayek gave advice to Margaret Thatcher: "slam on the brakes." The same advice made its way to Paul Volcker and Ronald Reagan. On both sides of the Atlantic, policy makers took the advice and put their feet to the brake pedals. Inflation rates declined over the next 30 years. Maybe they are still declining.
But now what have markets learned?
More to come...
Regards,
Bill Bonner
for The Daily Reckoning Australia