When One Central Bank Slows its Destructive Policies, Another Must Step Into the Breach...
We could call this the summary of Lorenzo Bini Smaghi's views, who frets in a recent FT editorial about the effects the Fed's decision to "taper" its "QE" operations may have on the moribund euro area economy.
In about two-thirds of the editorial, Bini Smaghi lists the ways in which a slowdown in monetary largesse across the pond might impact financial markets in Europe. There is nothing wrong with this analysis; in fact, a similar impact will likely also be felt in the US and elsewhere. After burdening the economy with the biggest money printing and deficit spending orgy in post-WW2 history, we must expect all the economic errors these policies have induced to become visible as soon as the inflationary policy is actually slowed down sufficiently.
However, the problem is that Bini Smaghi thinks that therefore, we need more of the same, only this time, the ECB is supposed to take upon itself the role of chief money printer. Naturally, there is not a single word about the causes of the last crisis, which was caused by a boom triggered by the very same loose monetary policies Smaghi once again supports. Smaghi not only thinks the ECB should print money in reaction to the turbulence the Fed's tapering may cause, but it should do so "preemptively".
"The only way to avoid such a scenario is for the ECB to counteract the restrictive effects produced by the combination of a US monetary tightening and renewed market turbulence. The measures announced so far do not seem to be sufficient, as their effectiveness largely relies on the prevailing demand for bank financing coming from European companies, which currently seem to have little incentive to invest and still need to deleverage. The ECB's balance sheet might thus continue to shrink, while the economic recovery slows down. Forward guidance, which aims primarily at short-term policy rates, may lose credibility as it is unable to prevent the rise in long-term rates."
In other words, wise bureaucrats who somehow know more than all those dumb businessmen insistent on deleveraging should force monetary expansion down the market's throat. Smaghi continues by elucidating the technicalities of his idea (regardless of these technicalities, it is of course the same hoary inflationism advocated by all etatistes):
"The only alternative is to step up the action aimed at further easing monetary policy. This can be done either in a pre-emptive or in a reactive way. If the ECB acts pre-emptively, by increasing the size of its balance sheet, and thus of the money supply, before tensions arise in financial markets, it can rely on a broader set of instruments and is less likely to be constrained on the type of assets to be purchased. Under these circumstances, markets will be affected more by the liquidity injected in the system than by the type of assets purchased by the central bank."
These finer points of central planning are of little concern to us, but this paragraph shows that Bini Smaghi indeed believes the economy can be "improved" by printing money. This erroneous belief is a tenet of what we like to call the "John Law School of Economics", since Law was the first economist who was let near the levers of a central bank-like institution and allowed to try this theory out - in spades. He managed to create a boom so vast that the ensuing bust laid waste to the economy of all of continental Europe for decades. For a number of reasons, the damage done by today's central bank policies isn't becoming evident as quickly, but the principles at work are exactly the same.
Lorenzo Bini Smaghi, who has successfully transitioned from actual central planner to armchair central planner.
(Photo credit: Alessia Pierdomenico / Bloomberg)
An Error of Interpretation and the "Most Expensive Conclusion"
Bini Smaghi continues:
"If instead the ECB intervenes only in reaction to the US monetary tightening, and after tensions have emerged in the markets, the range of instruments might be restrained. Purchasing a basket of assets (for instance government bonds) with a fixed key - for instance, the ECB capital - may not calm down the markets, and actually produce the opposite effect as the amount of low-yield assets purchased by the central bank could turn out to be much larger than the high-yield ones.
To counteract the undesired tightening of monetary conditions in some parts of the eurozone, the central bank might have to revert to selected asset purchases, as in the Securities Market Program implemented in 2010-11, which has many more disadvantages - technical and political - than quantitative easing which may be implemented through a broad range of assets."
The ECB's policies are already robbing savers blind, mainly in order to prop up what continues to be a rickety banking system in Europe. So the question is here: a tightening undesired by whom, exactly? Let us not forget, loose monetary policy props up all sorts of wealth-consuming activities that could not exist without it. This weakens the generation of real wealth in the economy as a whole. Naturally, monetary tightening will initially lead to a bust, as all these bubble activities are exposed as non-viable.
Bini Smaghi follows up with a conclusion that one could well generally refer to as "the most expensive conclusion" possible, no matter in which area of public policy it is applied - namely, the idea that "we must do something". How expensive such conclusions can become has been amply demonstrated by Greenspan's decision to boost the housing bubble by pushing interest rates to a ridiculously low level, and it is continually demonstrated in the realm of foreign policy as well. It is actually high time society got rid of the crowd of "we must do something" central planners and social engineers. How many times must we witness the complete failure of their approach before someone actually wises up?
In a moment of unintended hilarity, Bini Smaghi tops his admonitions off by invoking the authority of none other than Tim Geithner, of all people:
"The choice between these two strategies is not easy, but the experience of the past few years - not only in the eurozone but also in the US, Japan and the UK - has shown that the fear that increasing central banks' balance sheets would over time lead to inflation was based on a wrong analysis of the financial crisis and its aftermaths. Views might differ, but in the end what matters is action. As Tim Geithner writes in Stress Test, his recently published memoir, "It's better to be accountable for your own mistakes that for the mistakes of others."
In this final paragraph, Bini Smaghi actually lays several eggs at once. The "what matters is action" idea not only suffers from the "we must do something" syndrome. It also means that one would have to acknowledge that a bunch of bureaucrats knows better than the market, in which case the Soviet Union would surely have been a paradise and a fount of economic progress, since all economic decisions in it were made by bureaucrats. How come it didn't work out?
Regarding "inflation", Bini Smaghi's remark suffers from the same definitional error that bedevils debates about inflation in general: one of the possible effects of inflation has been given the name "inflation", so as to obscure its cause. We apparently no longer have a name for the cause of rising prices as a result. As Mises noted in Planning for Freedom:
"What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation."
What Bini Smaghi cites as "proof" that there have been no negative effects from the inflationary policy, namely the absence - thus far - of more pronounced consumer price inflation, is actually not at all proof that no harm has been done. On the contrary, the vast increase in the prices of titles to capital (stocks and bonds) is a symptom of the enormous distortions of relative prices in the economy the policy has fostered.
Bini Smaghi may believe this is harmless, but it clearly is anything but. It is exactly as "harmless" as Greenspan's housing bubble was. What Bini Smaghi is essentially arguing for is this:
"We cannot take the pain of a bust that rectifies the economic errors that have been committed due to our past policies. We therefore need to inflate more, and create an even bigger waste of scarce resources masquerading as growth."
This is what it ultimately comes down to. It should be obvious even to Bini Smaghi and those supporting his ideas that not even an iota of real wealth can possibly be created by increasing the money supply. Lastly, just because there has been no consumer price "inflation" thus far doesn't mean that this has become an eternal, immutable condition. It may arrive with a considerable lag, and if it does, it will definitely be a consequence of the inflationary policy of central banks.
Lorenzo Bini Smaghi was once a member of the ECB's board. He evidently has successfully transitioned from actual central planner to armchair central planner. Like all armchair planners, he believes he has a "better plan" than everybody else. If only monetary policy were tweaked in the manner he proposes, everything would surely come right this time! Such articles in the mainstream press are really a dime a dozen these days. We are still waiting for the debate to move on to the topic that actually should be discussed: namely, whether central planning by monetary authorities makes any sense at all.
Lastly, Mises had a lot more to say about inflation, but one brief quote should be kept in mind by everyone, because it is such a trenchant summary of the problem with the policy:
"Inflationism, however, is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time. Just as the sound money policy of gold standard advocates went hand in hand with liberalism, free trade, capitalism and peace, so is inflationism part and parcel of imperialism, militarism, protectionism, statism and socialism."
No, we don't need yet another bazooka.
(Illustration via slopeofhope.com / Author unknown)