Back in May, we noted that minutes from the ECB’s April 14-15 policy meeting seem to reveal that the central bank is either obtuse or else suffering from a frightening bout of willful ignorance. Here’s are the excerpts which led us to that assessment:
Since the Governing Council’s previous monetary policy meeting on 4-5 March 2015, the implementation of the ECB’s expanded asset purchase programme (APP) had had a significant impact on euro area financial markets, contributing to further declines in government bond yields.
A strong signal needed to be sent to euro area governments urging them to press ahead with structural reforms and to take measures to improve the business environment. Only with such complementary action could the full benefits of the monetary policy measures be reaped.
Now obviously, implementing a €1.1 trillion program designed specifically to lower government borrowing costs is the exact opposite of sending a “strong signal” to policymakers regarding the absolute necessity of getting serious about fiscal rectitude. That is, if it does anything, PSPP discourages governments from reining in spending by artificially suppressing borrowing costs, which effectively robs the market of the ability to price government risk.
Well, as it turns out, even if the ECB doesn’t understand this, Mario Draghi’s former employer certainly does, because a new paper co-authored by Goldman’s Huw Pill and Alain Durre acknowledges the role central banks play in discouraging fiscal discipline. Here’s more from Bloomberg:
The unconventional monetary policies of central banks often face limits because they could end up hurting as well as helping economies.
That’s the warning of Goldman Sachs Group Inc. economists Huw Pill and Alain Durre in a paper prepared for the first annual MMF U.K. Monetary and Financial Policy Conference to be held in London on Friday.
Their concern is that if central banks deploy overly generous unorthodox policies, there will be less pressure on governments and companies to do their part to revive economic demand. That could leave monetary policy stuck on the hook.
“By relaxing constraints on other economic actors, central-bank support may create opportunities for them to shirk their responsibilities,” the economists said in the paper, which was co-written with Cristina Manea of Barcelona’s University Pompeu Fabra andAdrian Paul from the University of Oxford. “In turn, this may render it more difficult for the central bank to withdraw its exceptional measures.”
With interest rates near zero following the 2008 financial crisis, central banks such as the U.S. Federal Reserve and European Central Bank adopted unconventional policies such as lending to banks and buying bonds to rally the world economy from recession and then support its recovery.
While acknowledging the case for such policies is strong, the economists said their use is not without risk and unless constrained could end up spurring inflation beyond the central banks’ targets.
“These risks are particularly acute when the broader fiscal environment is unfavorable,” they said. “Such risks are exacerbated if the non-standard measures weaken incentives for fiscal rectitude or private sector restructuring.”
The danger is that temporary liquidity support becomes permanent and that central banks find themselves under pressure to lead rescue efforts in future crises too. That would drain the independence and credibility of monetary-policy makers, undermining their inflation-fighting abilities, according to the paper.
In other words, by shouldering the entire burden of "rescuing" economies, central banks have alleviated lawmakers of any responsibility and the longer this dynamic persists, the more difficult it will be to reverse. Furthermore, in the event the public suddenly wakes up to what's going on, inflation expectations (which have so far remained muted thanks to a combination of plunging M2 velocity, QE's contribution to the global deflationary supply glut, and a populace that's generally ignorant to what's going on at the world's central banks) will suddenly become completely unanchored.
Of course this may ultimately be exactly what everyone wants as tipped first by Macquarie and then more forcibly by Citi with the conversation now taking a rather surreal detour towards a realm where very "serious" people are now openly suggesting that central bankers should remove the last intermediary in the government financing ponzi scheme by bypassing banks and moving straight to "central bank financed final demand." Throw in the fact that unconventional monetary policy serves to inflate larger and larger bubbles the bursting of which will be promptly trotted out as an excuse to implement still more unconventional measures and you have the recipe for perpetual easing/insanity which will eventually lead to the death of the fiat regime. We close with the following warning from the above cited Goldman paper:
“The road to central bankers’ hell may be paved with good intentions."