Financial journalists have a giant crush on central bankers. They have become smitten with these drab, dreary men (mostly) wearing suits and discussing arcane topics and write about them in starry-eyed terms.
A false narrative percolates throughout all of the financial journals in the mainstream media. I call it “Economic Engineering.” Financial professionals and the journalists who cover them have created a groupthink that believes central bankers can control the economy by selecting and activating the proper switches. By merely operating the controls correctly, one can achieve the desired result with the machine, also known as the economy. The elements of the narrative are
- The right formula of intervention in monetary policy will create economic growth that will fix everything.
- Once adverse consequences arise from the intervention, like inflation, central bankers can quickly compensate for them.
- If the current level of intervention is not working, then you need more intervention. In the current situation if printing some money does not do the trick then you need to print more money.
This narrative is very dangerous.. The world’s central banks have increased their balance sheets by a factor of three since the onset of the GFC with more expansion planned. Money printing has occurred an unprecedented scale.
The author of the FT article believes that these moves are revolutionary, but the only thing revolutionary about them is their new names. Devaluing the currency has occurred in various forms for thousands of years. In every case, inflation has resulted. Even in the current situation, cheap credit has inflated an asset price bubble in financial assets, commodities, real estate and art and collectibles.
Generally rising asset prices since 2009 have distorted all markets. Volatility remains depressed by the flood of cheap credit, so that prices no longer signal information. In fact, the only information we obtain from prices is that there is a lot of central bank intervention to pump up those same prices.
Money printing or QE in addition to causing inflation also increases income inequality by way of the Cantillon Effect. Eighteenth century economist Richard Cantillon noted that cheap credit helps those closest to the source. This is why large corporations and the rich are doing so well, and the worker is not. Cheap credit from the Federal Reserve flows first to TBTF banks, who are currently making record profits. Next, other large public companies receive the funds. Corporate profits are at their highest share of national income in history, while the worker continues to suffer in a weak labor market.
The cheap credit is failing to stimulate the economy. In the absence of demand, large companies do not increase capital spending but use the money to repurchase shares, pay dividends and issue new debt to replace more expensive older debt. Hence, the rich who own the majority of securities see their wealth and income rise as the cheap money flows to them through the corporations.
Even though the new money printing is failing, the central banks cannot stop now. Withdrawing support would cause the whole system to collapse. Besides, QE is more like a religion at this point. No one within the groupthink admits that it does not work. Rather, any time it is shown to be insufficient, the answer is always that more QE must be done. No level of proof is satisfactory to stop the madness.
A system sows the seeds of its own destruction. All of this debt has to be paid off by somebody sometime. Once people start wanting their money back, the endgame will be upon us.