A society grows great when old men plant trees in whose shade they will never sit.
– Greek proverb
YOUGHAL, IRELAND – Poor Christine Lagarde. The famous alumna of the Holton-Arms School of Bethesda, Maryland, is taking over at the European Central Bank (ECB).
She is the perfect person to run one of the most important banks in the world. She is fundamentally an insider… a crony… a political person, well-trained and well-suited to a political world.
It would not normally – and should not ever – concern us who is running the ECB. The position should be held by an anonymous technocrat, whose job is merely to make sure nothing funny happens on his watch.
We do not worry much about who flies our airplanes or who operates our nuclear reactors; we just trust they won’t make a serious mistake.
Likewise, a central banker doesn’t have to be a hero… and shouldn’t even get his name in the paper. He should not concern himself with the level of stock prices (it is none of his business)… nor with the economy (there is nothing he can do about it)… nor even with consumer price changes (unless he’s the cause of them).
He should be passive… unnoticeable… and immovable, like a rock… dumb and reliable.
But that was yesterday… or many yesterdays ago. Now, the ECB chief is a celebrity… a mover… a shaker… and a grifter of global prominence.
And – like Federal Reserve chief Jay Powell on this side of the Atlantic – he has a chainsaw in his hands… cutting down the trees that were meant to shade future generations in order to enjoy a brief moment in the sun for himself.
The ECB is an active, aggressive central planner/manipulator. Its writ is law. Its fantasies are reality for ordinary people. And its money is taken as the real McCoy.
And the fame of its current president, Mario Draghi, has spread far and wide… reaching even the president of the USA. In an interview with TV host Maria Bartiromo, Donald Trump said:
What Europe did with Draghi is they’re forcing money in[to the economy]; we’re doing the opposite. We’re taking money out [of the economy] and we’re raising interest rates – it’s insane.
That was back in June. Since then, the Fed has turned tail and is now “forcing money into the economy,” just like the ECB. At the present rate, it will add about $1 trillion over the next 12 months.
You’ll recall that Mr. Draghi took the controls at the ECB in 2011, when black smoke was streaming out of the Greek engine, and Italy and Spain were both losing altitude fast. The BBC reports on what happened next:
So Mario Draghi stepped in. It was perhaps the single most significant moment of his time at the ECB. In a speech – outside the eurozone in London – he told his audience and the financial world: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
Greece was considering its options. Maybe it would have to leave the euro. Italy and Spain could follow. Mario had his work cut out for him. What did it take to save the euro? More euros!
That was the jackass policy of almost all the world’s central bankers. In effect, they all realized that they had bumbled into an Inflate-or-Die trap.
They could either admit their mistakes and let the chips fall wherever they may. Or they could do “whatever it takes” to kick the can farther down the road.
Mr. Draghi, who had previously made such a great success of the Italian economy as head of the Bank of Italy, was the Pelé of can-kickers. And what it took to postpone the day of reckoning, from the day Draghi took his post to his last days this week, was $3 trillion of ECB money-printing.
That was more money added to the ECB balance sheet (which is how it creates money) than the total increase in the European GDP during the same period.
In other words, every euro of GDP increase was matched by a euro created by Mario Draghi – and then some. He was not only allowing funny things to happen, he was making them happen.
Fake! Faux! Falsch!
No matter what language you use, a description of Draghi’s policies and their aftermath begins with an F.
First, they haven’t produced real prosperity. That can be seen by looking at the growth rate. In the eight years before Draghi took the helm, European GDP growth averaged a limp 1.2%. Over the Draghi years, the growth rate was exactly the same, 1.2%. In other words, that $3 trillion added to the euro economy bought nothing.
Second, the money didn’t stop the business cycle either. For example, Germany’s manufacturing sector just registered its 10th straight month of decline. (Germany is Europe’s biggest economy by GDP.)
Third, Mr. Draghi saw his mission as getting consumer prices to rise by 2% per year. Two percent is the totem of almost all modern economists; less than 2% is a threat to prosperity, they believe.
But Mario Draghi inadvertently proved it was nonsense. Not only did he fail to reach his inflation target – the Consumer Price Index (CPI) fell from around 2% when Draghi took over to around 1% today – but GDP remained the same. Falling inflation levels did not cut into growth, in other words.
Of course, that was obvious from the get-go.
America’s greatest periods of growth and prosperity were marked by a low or falling CPI. The most dramatic example was also the most recent: the boom period (from 1980 to 2000) when inflation fell from 14% down to 3%; growth continued apace.
But neither the funny things that Mr. Draghi did… nor the funny things they have produced (lower growth, lower inflation, more debt… of which $17 trillion has yields below zero; heck, even Greece is now borrowing at negative rates) have taught central bankers or politicians… notably, Madame Lagarde… anything.
The claptrap continues.
Just before leaving the ECB headquarters, Mr. Draghi took aim at the can. Last month, he cut the ECB’s deposit rate to MINUS 0.5%… and kick-started another $20 billion-a-month quantitative easing program.
Over to you, Christine.