Mario Draghi at the ECB is being pressured to adopt a Quantitative Easing policy similar to that implemented by the Federal Reserve and the Bank of England. The argument most fervently pushed by Christine Lagarde, Managing Director of the IMF, warns of the “dangers” of disinflation/deflation, which apparently (?) leads to low growth and higher unemployment. What is poor old Mario going to do? (see footnote 1)
Christine Lagarde’s comments are irresponsible since they are based on Keynesian hope rather than economic fact. How can the IMF promote a policy such as QE, particularly given the Federal Reserve’s difficulty in extricating themselves from the mess created by three such attempts, each of which has failed?
Fortunately for Europe, the IMF has no power when it comes to framing ECB policy. Nevertheless, Mario Draghi is in a difficult position. He cannot argue with Lagarde’s assessment that Europe is experiencing low growth and low inflation, since this is fact. But if he takes the line that these economic problems are beyond the scope of the ECB then he is committing “Central Banker Hara Kiri” since his institution’s very existence is predicated on “doing something”. Similarly, if he uses the Federal Reserve as an example and takes the line that QE has not delivered any of the outcomes that it was meant to achieve, he would be perfectly correct, but this would be a direct insult to the Federal reserve, potentially damaging the unity that has been forged across the monetary authorities globally. As much as he may want to, he cannot publicly criticise QE as an ineffective policy.
Mario’s best course of action is probably to do nothing, say nothing derogatory about QE and hope the immediate pressure to adopt the policy fades away. That seemed to be the path he took in his press conference yesterday following the ECB’s rate decision. However, if the chorus in favour of a European QE gains strength, he will have no option other than to respond with a useless, senseless, baseless QE policy of his own, no doubt hoping that his successor will shoulder the burden of undoing the mess in the future.
(1) Frequent readers of this blog will already know that I am not a fan of Quantitative Easing nor active monetary policy generally for that matter. This is for the simple reason that these policies do not work. One only has to look at the recent or long-term track records of the numerous central banks around the world who try to “manage” their real economies to realise that these institutions cannot simply order an additional serve of GDP from a menu. Were it that simple, everyone would have a job and we would all be driving Rolls-Royces.
(2) apologies to my avid fans for not having posted a blog entry for the last six weeks. I have been immersed in rebalancing the Fund.