“Bold, new”, but ineffective, moves by central banks today signals the fragile nature of the state of the worlds’ economies. They cut rates again in order to stimulate growth. Push interest rates low enough, they believe, and prosperity will follow. Unfortunately, they have misunderstood the nature of this economic crisis and are doing the opposite of what is needed for recovery. I challenge them to point to a successful recovery brought about by ZIRP.
In order to revive their sinking economies, the European Central Bank cut their lending rate to 0.75% from 1.0%. China cut its rate to 6% (-0.31%) and eased bank lending standards. The Bank of England bought $78 billion of gilts. This managed to instill no confidence in the markets, as they interpreted the moves as indicating that things are worse than the banks were letting on. Yields on Spain’s Tesoros and Italy’s BTPs jumped today as investors saw these efforts as being ineffective. What investors want is for the ECB to start buying the bonds of member states. Mario Draghi, president of the ECB and Ms. Merkel are cool to that idea. Here is what is driving investors’ fear:
The euro zone’s bailout fund—the European Stability Mechanism—which is expected to come into force this month, will have a capacity of €500 billion ($626 billion), but it will have large commitments and not nearly enough cash for a sustained program of bond purchases to pump up demand. Many policy makers have hoped the ECB would fill that role—either by making the purchases itself, or by permitting the ESM to have a banking license and, with it, access to the ECB’s cheap lending.
The problem in the Eurozone is that the PIIGS spent too much of other peoples’ money (Germany’s) and their national central banks allowed credit to expand to promote economic growth. The result of both policies has been economic depression, declining tax revenues, and governments and banks that are bankrupt. Those states that produced more than they spent, mainly Germany, are now being asked to pick up the tab. Something has got to give. As we have been saying here, there is no solution to Europe’s problems other than money printing, which, as we also have been saying, is a road to failure.
Think, “twisting slowly in the wind.”