The Bank for International Settlements Proposes Sadomonetarism To Promote Recovery, Higher Inflation What Greek Crisis?

A Benjamin Cole post

The central banker’s club known as the Bank of International Settlements (BIS), suitably HQ’ed in Basel, Switzerland, this past weekend released its annual report, and advocated the globe’s major central banks raise interest rates to combat the chronic lack of aggregate demand and low inflation-deflation dogging the world’s developed economies.

Greece may be melting down under relentless tight-money policies of the European Central Bank (ECB), but no worries.

“Rather than promoting sustainable and balanced global growth, the system risks undermining it,” Mr. Claudio Borio, head of the monetary and economic department said. “It has spread exceptionally easy monetary and financial conditions to countries that did not need them, exacerbating vulnerabilities there.”

That must explain the global double-digit inflation we see emerging. So much easy money!

Seriously, the Cleveland Federal Reserve Bank says inflation expectations are below 2% for the next 10 years—this is “easy money”? Greece is scant mentioned in the BIS annual report, except to be damned for pushing the ECB to an “easier” stance.  I wish I was making this up.

Democracy And Central Banks

The old saw is that democracy is a lousy way to run a country, until you try any other way. One can certainly rue the economic structural impediments that become permanent fixtures in democracies, what with voting blocs and accommodating office holders.

But the incredible arrogance, ineptitude and theo-monetaristic certitude of central bankers certainly tops any stupidity foisted by voters upon themselves. Voters can and have voted in tax and regulatory platforms that slow down economic growth—but the tight-money lunatics at BIS and the ECB have devised schemes that obtain actual, sustained contractions of economies.

Western central bankers, unmoored from reality or any connection to actual economies—they get their salaries no matter what is the real economic growth rate—have become economic ISIS-men, genuflecting to and implementing an ascetic ideology even as it wreaks destruction.

Remembering Milton Friedman

It is difficult to believe that less than 23 years ago, in Oct. 1992, Milton Friedman bashed the U.S. Federal Reserve in The Wall Street Journal op-ed pages for being too tight—and that, when the Fed had just cut the federal funds rate from 10% to 3%, and CPI-inflation was 3.2%! In 1992 Q4 real growth clocked in north of 4.0%.

Friedman rebuked those who erroneously connected low rates to “easy money”—just the opposite is true, he pointed out. Years of “easy money” do not result in ZLB and deflation. Except perhaps, to demented BIS gnomes.

The slavish zeal for microscopic inflation rates or even deflation at any cost is a new and dangerous affectation among the money-obsessed, especially central bankers. And tight money has not worked! Look at Japan, Europe, or the U.S. in 2008.

Indeed, when did monetary suffocation end up in the nirvana of rapid real growth and but zero inflation?

Never and nowhere.

Bad News

I see no optimistic economic outlook for Europe.

The annual report from the BIS suggests a depth of monetary-policy depravity to rival the Mariana Trench. Europe has an un-democratic central bank that will suffocate parts of Europe for decades, and pompously pettifog the whole time.

The Federal Reserve may be a bit better. One can at least hope the GOP will win in 2016, and like President Nixon, or the Reaganauts, the installed GOP go after the Fed to print more money. Remember, hounded by Reagan’s minions, Fed Chairman Paul Volcker in 1981 declared victory on rising prices—when inflation was at 4%. Today 4% inflation would be presented economic bubonic plague. Funny thing, America prospered in the 1980s with moderate rates of inflation, and then again in the 1990s.

The Bank of Japan and the People’s Bank of China may be the best of the central banking lot today.

Invest accordingly.

Germany is not fit to lead!

That´s my conclusion from (Germany Finance Minister) Wolfgang Schäuble´s NYT article “Wolfgang Schäuble on German Priorities and Eurozone Myths”:

The financial crisis broke out seven years ago and led many countries into an economic and debt crisis. A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence(!) that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis. Let me run through some of these myths.

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My diagnosis of the crisis in Europe is that it was first and foremost a crisis of confidence, rooted in structural shortcomings. Investors started to realize that the member countries of the eurozone were not as economically competitive or financially reliable as the uniform bond yields of the pre-crisis years had suggested. These investors began to treat the bonds of certain countries with much more caution, causing interest rates for those bonds to rise. The cure is targeted reforms to rebuild trust — in member states’ finances, in their economies and in the architecture of the European Union. Simply spending more public money would not have done the trick — nor can it now.

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The priorities for Germany, as the current president of the Group of 7 nations, are modernization and regulatory improvements. Stimulus — both in fiscal and monetary policy — is not part of the plan. When my fellow finance ministers and the central bank governors of the G-7 countries gather in Dresden at the end of next month we will have an opportunity to discuss these questions in depth, joined — for the first time in the G-7’s history — by some of the world’s leading economists. I am confident that we can reach some common ground in Washington in advance of that meeting.

Maybe Germany´s Finance Minister has a “euro death wish”! A real Greek exit, not just Grexit, is upon us, ever more likely. With that the whole will be broken and the euro will be perceived as just another (likely to fail) fixed exchange rate arrangement!

The NGDP contrast between core and periphery (with Greece as the “benchmark).

German Leads_1

German Leads_2

Schaüble´s idea that “many European countries are reaping the rewards of reform and consolidation efforts” is risible. Just compare RGDP in the EZ with RGDP in the US since the 2007 cyclical peak.

German Leads_3

I wonder who “some of the world´s leading economists” attending the G-7 will be.

Update: You really can´t square Schaüble´s “The financial crisis broke out seven years ago and led many countries into an economic and debt crisis” with the facts, especially regarding Spain, whose debt/gdp at 36% in 2007 was one of the lowest in the EZ (and at that point Spain was running a fiscal surplus!). It looks and feels like a monetary induced NGDP crisis!

German Leads_4