Central banks dining with the devil!

September 16, 2015 0 By Michel Santi

One after another, every establishment which has the power to print money has joined in on the feast. In the absence of public policies dedicated to openly relaunching growth and battling unemployment, and in the presence of indecisive politicians who are not versed in economics, only central banks have had the ammunition capable of neutralising deflation and the recession. And they joined in on the festivities with the utmost seriousness and printed money to their heart’s desire.

The US Federal Reserve were the first to dig in, very quickly followed by the Bank of England and Bank of Japan. The latter has used and abused its fair share of quantitative easing with no economic benefit since 2001, but these have been inadvertently nullified by a policy of austerity put in place by successive governments, all of which paralysed by public debt. Subsequently, it was belatedly that the European Central Bank resolved to join the debauchery vehemently stigmatised by prudish and industrious Northern Europeans. From atop of its enormous reserves, the Bank of China had the honour of giving the dinner’s closing speech under the weight of a decaying national stock market since it had lost 30% in the space of a few weeks.

It is therefore our global economic activity which has become progressively dependent on – or do I mean addicted to? – central bankers, who are non-elected by definition, who have been heavily burdened, especially given that our politicians, by definition elected, have been shirking their responsibilities in the fight against unemployment and stagnation. Occupying a large part of the media and economic front, the orthodoxy has from that point onwards been quick to accuse the central banks of artificially maintaining low interest rates via their policy of monetary creation, thereby contributing to the penalisation of savers and the weakening of economies that have been henceforth much more vulnerable to hyperinflation (according to this neoliberal school of thought). To quote Paul Krugman’s expression, an economist that they love to hate, these “very serious persons” have, however, brushed under the carpet the fact that it is precisely these zero interest rates that were meant to encourage investors to take greater risks, which is conducive to economic recovery.

Pursuing nevertheless their unrelenting work to undermine the central banks, the hyper-orthodoxy has also let a unique phenomenon, unprecedented in the annals of history,  pass it by, only to discover that they should maybe have looked elsewhere for the foundations of this unparalleled environment of zero or even negative rates. Is it -in fact- the central banks who are to blame in the context of these zero rates and zero output, or have they just been trying to manage a situation where these rates are horribly compromised in light of the persistence of our labouring productivity and prevalent stagnation for nearly a dozen years? If, therefore, it is true that our central banks come hand in hand with – and sometimes cover up – large-scale global deflationist and recessionist tendencies, these tendencies would be exactly the opposite of the fantasy outlined by the orthodoxy. Basically, they are nigh on powerless in the face of the forces that surpass them and that they are trying their best to direct.

It is a fascinating debate, nonetheless spectacularly ignored by the aristocracy of economists and which consists of figuring out whether the central banks simply adapt themselves to the secular stagnation which is characteristic of integrated Western economies, and which is even to this day infecting emerging nations. It is, as it happens, a terrifying situation made up of an inflation rate of merely 1.3% in the most progressive country in the world (the States) and 1% in Great Britain. It has also been worsened by the implosion of a speculative stock market bubble in China, and the finishing touches were added by the lowest prices of raw materials for 12 years and by oil prices which have collapsed by 55% in a year! It is, in certain regards, a more perilous situation than the darkest hours of 2008 and which – whatever may come of it – doesn’t inspire much more confidence than investment.

Who right now would want to be in the shoes of Mario Draghi (ECB) or Janet Yellen (Fed) as they desperately try to resuscitate an economy with liquidity transfusions which are directly responsible for the formation of speculative bubbles and therefore financial instability? Do they accept that growth is doomed to remain anaemic, indeed inexistent in light of constantly declining productivity, or do they reboot the machine whilst running the risk of destabilising it by taking excessive risks? Such is thus the challenge presented to our central bankers by secular stagnation, who are confronted with what they know is a zero-sum game.

This undeniable secular stagnation might in some way be the type of decadent display of capitalism that we have become accustomed to, and could signal a return to the negligible growth of pre-capitalism, and its system typified by hierarchy and feudality.