Wow! This was a shocker. Yesterday the bankers in Frankfurt came unglued. In an attempt to stimulate the euro-area economy, Mario Draghi and his compatriots at the European Central Bank threw everything they could think of at the European financial system. Not only did the ECB lower interest rates further into negative territory, offer banks another sweet financing deal, and expand the rate of money printing, they also decided to include corporate bonds in their bond buying program.
Yup, the ECB is now directly financing private businesses in the euro-area to stimulate growth. Sounds more like subsidization than stimulus, does it not?
What else would you call it?
With the ECBs decision to subsidize euro-area businesses, we now have two of the world’s largest central banks (the Bank of Japan and ECB) buying up the debt and equity of private businesses.
Japanese and euro-area businesses have been given a gift by their central banks. They now have a huge cost of capital advantage over their U.S. counterparts as well as a buyer of last resort for their bonds.
No wonder Bernie Sanders and Donald Trump’s anti-trade messages are resonating. Americans aren’t dummies. They recognize when we are getting a raw deal. It was one thing when emerging China manipulated its currency and subsidized its businesses to steal market share, but now we have the world’s largest economy (the euro-area) and the fourth largest economy (Japan) engaged in the same kind of mischief. How are American companies supposed to compete?
The global central banking cabal is driving the global economy further and further into the ditch. The misallocation of capital from central bank policies is beyond belief. We are talking many trillions of dollars. And misallocation isn’t the only problem emanating from experimental central bank policies. The central banks have also created a massive currency war. Sure, many bankers deny there is a currency war, and others are ignorant of it, but the proof is there to see for anybody who cares to look.
The worst part of this monetary misadventure is that there is no accountability at central banks. The politicians don’t understand the economics well enough to hold the central bankers’ feet to the fire. And even when there is evidence that monetary policies don’t achieve the results they were designed to, the central banks claim they just need to do more of what hasn’t worked.
Witness the ECB’s decision yesterday, or the Bank of Japan’s perpetual QE program. Both banks have held the monetary pedal to the floor for years now in an effort to boost inflation. But inflation has only gotten lower as the stimulus has increased. So what do the central banks do? You got it, more of what hasn’t worked.
Maybe it’s time our monetary leaders pursue a different course.
Jeremy Jones, CFA
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