Central banks’ “whatever it takes” moment: Will it help?

Central banks are again trying to throw the sink at the financial markets. They are searching for  a comment similar to Mario Draghi’s “Whatever it takes” which helped save Euro (atleast that is what we are told).

Some comments on the central bank actions:

  Willem Buiter on the recent Federal Reserve action:

The US Federal Reserve’s surprise weekend announcement of a large interest-rate cut, renewed quantitative easing, and other expansionary measures is a welcome response to the COVID-19 pandemic. But as markets were quick to note, monetary policy cannot save us from this crisis.

Ananth Nageswaran on his blog says monetary solution is the problem:

The handling of Covid-19 and the debt epidemic are studies in contrast. The attempt with the former has been to isolate, contain and slow the spread. With the latter, central banks have done the opposite. They have fanned it, enabling its spread and encouraged further infection. They are at it again this week. To expect it to end without economic and social consequences is to hope that the suspension of disbelief could be eternal.

But what are these “tools” that have policymakers, financial practitioners, and commentators so worked up? Renewed quantitative easing, the zero interest rate target, 84-day dollar swap lines, special repo facilities at the New York Fed, zero reserve requirements, etc., are nothing but cunning and arcane techniques for conjuring additional trillions of dollars out of thin air and pumping them into the global economy. Since its inception the Fed has always had one and only one tool for manipulating the economy: printing money. And this tool will never dull or break, and can be used again and again under any and all circumstances short of hyperinflation.

The real question is whether this tool will work to mitigate the economic contraction that will inevitably follow the supply-side shock of the COVID-19 epidemic and the deflation of the equity bubble (possibly followed by deflation in other asset markets). Common sense and basic economic theory tell us that the writing up of digital dollar balances will not alleviate the greater scarcity of concrete goods and services goods caused by shuttered factories and commercial establishments and by the lowered productivity of employees forced to work at home. Furthermore, the Austrian theory of the business cycle as illustrated by recent history does not encourage optimism that the imminent deluge of new dollars will encourage a swift and robust recovery from the impending recession. In fact, from 2010 to 2019, the US money supply (M2) increased by 80 percent, from $8.475 trillion to $15.243 trillion, and yet the US economy experienced a painfully protracted recovery from the post–financial crisis recession, followed by historically slow real output growth during the “boom” period despite the fact that asset market bubbles formed. Quarterly real GDP growth fluctuated between 1 and 3 percent during this period, except for five quarters in which it slightly exceeded 3 percent.

Most important, the announced expansionary policy could not be more ill timed. For it is imperative during a contraction of the economy caused by war, natural disaster, or epidemic that the price system be left free and unhampered to reveal the most valuable uses of productive resources whose quantities have been substantially reduced. Only this policy will facilitate the optimal path to a temporarily smaller economy and ensure that the most pressing demands of consumers are met during a period of greater resource scarcity. Unfortunately, the stated intent of the new Fed policy is precisely to stabilize the economy, that is, to prop up and maintain firms, industries, and productive activity as they were in the status quo ante. But this is clearly impossible given the shrunken supplies of the factors of production. By inundating the economy with money the Fed will not succeed in miraculously expanding these supplies but instead will distort the price structure and promote misallocation, malinvestment, and the waste of productive factors, thereby deepening and lengthening the recession.

What a shock Covid19 has created for humanity. Time for nature’s revenge on humans?

One Response to “Central banks’ “whatever it takes” moment: Will it help?”

  1. Blogul lui schmoukiz » Blog Archive » Tiparnița și sforile dobânzii Says:

    […] dar a asigurat doar rate mici de creștere. Creșterile de PIB au rămas în zona de 1-3%, notează Joseph Salerno. Inutil să mai remarcăm că scara acestei intervenții depășește ideea unui mic ajutor de […]

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