The uncontrolled monetary expansion that is spreading throughout the world is dangerous and irresponsible.
All the major shocks that have hit capitalism – speculation over tulips in Amsterdam in the 17th century, the financial crashes of 1929 and 2008; the John Law bankruptcy in 1720; the bubbles over railroad stocks in the 19th century, automobile stocks in the 20th century and digital stocks in the 21st century – have one common feature: the uncontrolled increase in forms of payment and their gratuity. They all derive from a combination of the same illusions: a faith in unlimited prosperity, the fascination for making a quick fortune, freedom from constraints of financial, monetary and budgetary equilibrium in the name of a method of growth, and a technological revolution or a geopolitical situation that are presumed to be unprecedented and different.
Eleven years after the worst crash that capitalism has seen since 1929, monetary policy has never been so expansive.
Under pressure from politicians who are putting the banks’ independence ever more in question, the central banks are acting in favor of business activity at any cost. In the USA, the Fed has stopped shrinking its balance sheet, which has reached 3.8 trillion dollars, and has lowered its rates by 0.25% for the first time since 2008. In Europe – and driven into it by Mario Draghi –, the ECB is preparing to launch a new program of asset buying and to drop its interest rates, which are already at an all-time low (-0.40%). Ten central banks lowered their rates in the second quarter of 2019 and eight did so in July. Since 2014, negative interest rates have become common, first in Japan and then in Europe.
The first effect of lowering interest rates is to remove any constraint on state indebtedness. Monetary expansion therefore goes hand in hand with budgetary increases, as in the USA where public debt will reach 1,000 billion dollars by 2020, i.e. 5.5% of GDP, at a time when the unemployment rate (3.7%) is at its lowest since 1969. The borrowing frenzy is now reaching households – notably for house-buying – and companies, particularly in sectors that are the most affected by the digital revolution and in the poorer regions, like southern Europe.
The uncontrolled monetary expansion that is spreading throughout the world is dangerous and irresponsible. From an economic standpoint, it provides only marginal support for the real economy for, even though the central banks know how to issue forms of payment, they cannot control their use or affectation. This outpouring of liquidity has in no way seen any priority given to production and investment that could improve potential growth and productivity, but instead has boosted unearned income, helped companies that are oligopolies and increased inequality. From a financial standpoint, the banks are being ruined by negative rates of interest, which bring about a rise in “shadow finance” with assets going into the non-banking financial sector. From a political standpoint, penalizing savers contributes to the destabilization of the middle classes in developed countries and fosters populism.
Above all, giving away easy money is just a way of dispensing notional purchasing power and creating widespread speculative bubbles – in real estate, modern art, sovereign debt, and companies’ high-yield shares and securities. Recession is only held at bay at the cost of a methodical preparation for another crash that will cause the collapse of employment, business activity, prices and income. At the same time, the current acceleration of monetary and budgetary expansion is depriving politicians and the central banks of any ability to react. Furthermore, the hatchet job that Donald Trump is doing on multilateral institutions hinders the possibility of the international cooperation and concerted strategy that played a decisive role in containing the risk of worldwide deflation in 2008.
Currency control is still the fastest and most powerful instrument of economic policy. It has to be activated in times of economic crash or deflation, but not to underpin overheating when there is full employment. Besides, it is an illusion to think that reliance on currency control can put off or avoid any structural reforms that are needed because of an ageing population, the digital revolution or climate change.
Free money is an economic addiction with no possibility of a happy end. We know it will end in a crash. The only thing we don’t know is exactly when. Ultimately, it could even result in the collapse of a currency, as in the case of Zimbabwe and Venezuela. Given the evident slowdown in growth worldwide (3%) and in international trade (2.5%), priority must be given to re-establishing the way in which budgetary and monetary actions have room to maneuver, to strengthening the euro zone by creating a banking union and unifying the capital markets, to improving the global safety net that can deal with any shock to international liquidity (currently standing at 4,000 billion dollars), and to preserving the multilateral system for handling the systemic dangers of worldwide capitalism.
Ernest Hemingway was right to say that “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”
(Column published in Le Figaro, 6th August 2019)