Just when you thought central banks couldn’t get any nuttier, the European Central Bank (ECB) has gone and done it. One of the ECB’s new programs may actually pay banks to borrow from it. Take away all the accounting sleights of hands and the net result would be an outright payment to those banks. It’s a direct subsidy, so why all the subterfuge? Just set up a direct pay-for-loan system, the more the banks loan the more the ECB pays them. That’s what most likely will happen eventually. It would be much simpler and much more honest, which is probably why they’re not doing it right now.
Then the ECB will also be starting to purchase euro-denominated corporate bonds. That is a move that has long been speculated but now confirmed. The result of that, of course, is to drive up prices and therefore drive down yields for euro-denominated corporate debt. In theory it should be great for European companies, as they can now fund their operations through cheaper debt issuance. The snag is that much of the euro bond issuance recently has been by smaller European companies and large multinationals such as Apple. The ECB will face a dilemma then, whether there are enough euro-denominated bonds of the type that it wants to buy in order for it to “stimulate” the European economy as it wants to. Excluding certain types of investment-grade bonds could shrink the pool of eligible securities from €1.6 trillion to €554 billion. Will that be enough for the ECB to shock and awe markets? We’ll see. Purchasing corporate debt won’t stimulate business activity or consumer demand, it will more likely enable corporations to raise money for stock buybacks, exchanging stocks for near-zero interest rate debt. Lovely.
When will the ECB end this absurdity? Who knows. When negative interest rates were first being floated two years ago, no one thought it would last this long. Now we’re to the point that the ECB is paying banks to borrow money and loan it out, as well as trying to actively encourage European companies to issue more debt in order to fund their operations. When will they realize that the handful of policymakers at the ECB cannot substitute its wishes and desires for the needs of individuals and businesses? If banks aren’t loaning money, it’s because they deem the business climate to be too risky to gain a decent return. Paying banks to loan money won’t help that. Buying corporate bonds won’t help that either. It won’t keep borrowers from defaulting, it will just ensure that yet more money is funneled into companies and sectors that are already heavily indebted. Too much easy money and too much debt is the problem, not the solution. But the ECB seems to get that backwards.
The ECB and monetary planners around the world need to realize three things.
1. Money is not wealth.
If it were, Zimbabwe would be the richest country in the world. Money derives its value not from government fiat or imprimatur but rather from its use as a medium of exchange. If you create more money from nothing, you reduce the purchasing power of each unit of money. The only people who benefit are those who receive the new money first, e.g. banks, while everyone else suffers a reduced standard of living. And if you create so much money that it takes a briefcase or wheelbarrow full of cash to purchase groceries, you haven’t created wealth – you have destroyed the monetary unit and you will destroy the economy along with it.
2. You can’t print your way to prosperity.
See above. Prosperity comes from savings, investment, and production. Income must be saved and invested, capital must be accumulated, maintained, and not consumed so that more can be produced in the future. Consuming everything in the present guarantees a hand-to-mouth existence with no prospect for growth. Any farmer knows what happens when you eat your seed corn. Only by deferring a portion of present consumption can economic growth take place.
3. Say’s Law still holds true.
Demand has its origin in a prior source of supply. Central bankers don’t believe in Say’s Law and believe that all that is needed for economic prosperity is a stimulation of demand. That is why they create money and inject it into the economy, in the hopes of stimulating demand. But all the demand in the world cannot do anything if those demanding are not producing. Are homeless people poor because they demand less than others? No, they’re poor because they don’t produce anything. As soon as they are able to start producing, they have the resources to satisfy their demands. As human beings, our desires are unlimited but our ability to fulfill them is not. Trying to fulfill our desires by begging or demanding from others isn’t terribly effective. The best way to fulfill our desires is to produce something that is desired by someone else. Only then can exchange take place. Creating money out of thin air won’t cut it.
These aren’t difficult lessons. They used to be taught in Economics 101, and still are in those handful of classrooms that haven’t succumbed to Keynesianism. They also happen to be pretty common sense ideas that anyone who has worked a real job, started a business, or engaged in a substantive hobby understands intuitively. That’s probably why the ECB and central bankers around the world do what they do, because they have been feeding from the public trough for so long that they either don’t know these things, don’t care, or are deliberately enriching their cronies. None of those possibilities bodes well for the long-term stability of the Western world.
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About Paul-Martin Foss:
Paul-Martin Foss is the founder, President, and Executive Director of the Carl Menger Center for the Study of Money and Banking, an Arlington, VA-based think tank dedicated to educating the American people on the importance of sound money and sound banking.
Prior to founding the Menger Center, Mr. Foss worked in the U.S. House of Representatives for seven years, including six years as Congressman Ron Paul’s legislative assistant for monetary policy and financial services, and one year as Deputy Legislative Director for Congressman Thomas Massie.
As Congressman Paul’s legislative assistant, he assisted the Congressman in his duties as Chairman of the Subcommittee on Domestic Monetary Policy by helping to develop hearing topics, agendas, and briefing Congressmen and their staffs on monetary policy topics. Mr. Foss also was responsible for the management of Dr. Paul’s monetary policy and financial services legislation, including the “Audit the Fed” and “End the Fed” bills, and was co-editor of Ron Paul’s Monetary Policy Anthology, a multi-thousand page compilation of hearing transcripts, lecture transcripts, and other documents related to Dr. Paul’s chairmanship.
Mr. Foss received his Bachelor’s degree from The University of the South (Sewanee), and Master’s degrees from the London School of Economics and Georgetown University’s Edmund A. Walsh School of Foreign Service.
This article appeared on the Carl Menger Center for the Study of Money and Banking and is reprinted with permission, “Creative Commons 4.0.”
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