by Claudio Grass, Acting Man:
The Rationale for Interventionism
It has been almost eight years since former U.S. President George W. Bush warned the world that “without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold.”
The government’s response to the crisis was a USD700 billion rescue package that was supposed to prevent U.S. banks from collapsing and encourage them to resume lending, which was soon to be followed by a series of Quantitative Easing (QE) packages injecting money into the economy.
The rationale for this government intervention was that it would boost spending, restore confidence in the market and reignite economic growth to everyone’s benefit – but has it succeeded in doing so?
QE: Faith-Based Monetary Policy
With QE still ongoing (albeit tapered down to reinvestment of maturing debt), it is no longer part of a “rescue” package – it has now become the new normal – despite the utter lack of positive results.
Since end-2007, the Federal Reserve’s balance sheet has expanded from about USD 890 billion to more than USD 4.5 trillion. And yet, U.S. growth rates have remained in the vicinity of just 2% since 2010 (see chart below).
It is no different in Europe. The European Central Bank (ECB), which first embarked on QE in March 2015, has raised the monthly amount for asset purchases from EUR 60 billion to EUR 80 billion, and expanded the range of assets to include corporate bonds.
Despite that, the growth outlook remains dim, with consensus expectations of 1.4% in 2016, and 1.7% in 2017 (source: Bloomberg). So why do governments continue to cling to an approach that simply doesn’t deliver?
“All present-day governments are fanatically committed to an easy money policy”, Ludwig von Mises observed in Human Action in 1949, and to this day, nothing about that seems to have changed.
Ever since governments, represented by their central banks, have monopolized the production of money, while backstopping fractionally reserved banks, the markets haven’t been free from intervention.
Monetary expansion happens all the time, not just in crises. In fact, the world has grown accustomed to this monetary policy, the new normal – and here is why:
To justify increasing liquidity, they say, “unemployment is high” or “economic growth rates are lower than expected”, and “inflation is too low”. But as we see in the chart below, the economy hasn’t really improved now, has it?
The False Promises of QE – There Are Only Few Winners
Even though Keynesians and other opponents of free market economics say there is no such thing as a “trickle-down effect”, QE is based on the very assumption that it will trickle down and spur economic growth by boosting spending.
But with low growth rates, weak currencies, and zero-to-negative interest rates, one has to wonder: who really stands to gain from this monetary policy stance?
Developed economies have been increasingly dominated by the financial sector in recent decades. Compared to the 1960s, the share of the financial sector has more than doubled from 4% to about 10% today, according to Forbes.
This can be attributed to the closing of the gold window back in 1971, when the American administration looked for an easy way to finance the welfare- warfare state.
The American citizenry was deluded into thinking that higher spending and more money printing were intended to improve the economy’s performance. In reality the government was trying to use an unbacked currency to print its way out of its debt burden.
Inflation does not affect everyone equally. Those who are wealthy and well-connected to the banking system are benefiting from inflation, because they are usually among the earliest receivers of newly-created money.
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