by Claudio Grass, GoldAndLiberty:
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 would 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 of government intervention was to boost spending, restore confidence in the market and revamp economic growth to everyone’s benefit – but did it succeed in doing so?
QE: Faith-based monetary policy
With QE still ongoing (albeit tapered), it is no longer part of a “rescue” package – it has now become the new normal – despite a complete lack of positive results. Since end-2007, the Federal Reserve’s balance sheet expanded from about USD890 billion to more than USD4.5 trillion!
And yet, U.S. growth rates have remained in the vicinity of 2% since 2010 (see chart below). Europe is no different. The European Central Bank (ECB), which first embarked on QE in March 2015, raised the monthly amount for asset purchases from EUR60 billion to EUR80 billion, and expanded the range of assets to include corporate bonds – but despite that, the growth outlook remains dim with 1.4% in 2016, and 1.7% in 2017 (source: Bloomberg). So why are governments still clinging 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 1949 in “Human Action”, and to this day, little seems to have changed. Ever since governments, represented by their central banks, monopolized the production of money, and accordingly fractional reserve banking – our markets have never been free from government 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 increase 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?
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