The announcement of the euro-QE was not the start of Europe’s monetary Dark Age.
That started many years ago with Chancellor Kohl’s undermining of the “hard deutsche mark Bundesbank” in the late 1980s. The darkness further descended when the newly created European Central Bank (ECB) implemented monetary frameworks which essentially tied Europe into a global 2-percent-inflation standard, following the US Federal Reserve.
The darkness continues unabated with the ECB’s decision in January to pursue its own version of the “Great Monetary Experiment” (GME), launched first by Obama’s architect-in-chief Professor Ben Bernanke and his fellow travelers in the Federal Open Market Committee (FOMC). One would have thought that before this could happen there would have been exhaustive hearings both within the ECB and the German and French parliaments about just how successful, or not, the GME had been. They should also have looked at the record of Abenomics in Japan. And even as the final hour approached, with the die all but cast, no one at the ECB press conference asked the question:
Signore Draghi, why are we in Europe embarking on a monetary experiment which has already failed in the US and Japan? I mean by failure, the fact that this is the weakest economic expansion ever following a Great Recession in the US. And we are already witnessing the bursting of a huge oil and commodity bubble with, yet unknown but almost certainly, severe consequences, whilst in Japan there has been a second recession, not economic renaissance as Prime Minister Shinzo Abe promised.
The Easy-Money Enthusiasts are Emboldened
But no, there was none of that. Instead on the eve of the launch, even more monetary nonsense was to emerge. First, from Rome there was socialist Prime Minister Renzi calling for the euro to make its smooth descent to parity against the US dollar — its “natural level.” And then, ex-ECB board member Professor Lorenzo Bini-Smaghi, in an editorial for London’s leading Keynesian financial newspaper, The Financial Times (January 20), admired how the ECB was about to repudiate political interference from Berlin in defense of “price stability” (meaning 2 percent inflation). The ECB was establishing its “independence,” Bini-Smaghi wrote, just as the Bundesbank had done against Chancellor Adenauer in raising rates by 2 percentage points when he had demanded no rise at all. In the monetary cult, 2 percent inflation forever and a recurrent deadly plague of market irrationality (what Keynesians describe as “animal spirits”) represents the ideal resting place.
Now that the monetary barbarians have finally sacked Frankfurt, with the incredible cooperation of Chancellor Merkel, it is not too early to ask when a system based on stable money might return. The answer is: don’t look to Rome! Although both improbable and risky, one option is a political earthquake in Germany which would lay waste to the current system, and thrust that country out of the European Monetary Union and toward the resurrection of the “hard deutsche mark.”
Are Central Banks Too Weak?
But let’s take one step back and review Kenneth Rogoff’s recent comments from Davos. In spite of himself, Rogoff managed to utter some truth about the likely future for long-term inflation. In a January 21 Bloomberg TV interview with Tom Keene, Rogoff gave a gloomy warning, though it’s unclear whether or not he would view it as gloomy. The long-term bond markets are now assuming that central banks in the US, Europe, and Japan will be unsuccessful in achieving their 2 percent inflation targets, and that inflation will remain well below that level, even in the long-run. That is foolhardy. The central banks may seem weak for now, but do not underestimate their power to achieve inflation in the long-run! Professor Rogoff did not go into details about how this ability might return, but in technical terms we could say that will happen when the neutral level of interest rate rises — whether (optimistically) due to blossoming of investment opportunity or (pessimistically) due to growing capital shortage (in the worst cases triggered by war or other disasters). At that stage, the massive excess reserves now in the various monetary systems would feed a wider monetary and lending boom.
That is how the failed Roosevelt QE policies of 1934–36 ended — after the Crash and Great Recession of 1937–38 came the war and high inflation. Let’s hope the sequel to Obama-Merkel-Abe QE is different.