A lot of good economic theory boils down to the acronym TANSTAAFL, which
stands for “There Ain’t No Such Thing As A Free Lunch”. TANSTAAFL is an
unavoidable law of economics, because everything must be paid for one way or
another. Furthermore, attempts by policymakers to get around this law
invariably result in a higher overall cost to the economy. Unfortunately,
central bankers either don’t know about TANSTAAFL or are naive enough to
believe that their manipulations can provide something for nothing. They seem
to believe that the appropriate acronym is CBCCFLAW, which stands for
“Central Banks Can Create Free Lunches At Will”.
ECB chief Mario Draghi is the leader in applying policies
based on CBCCFLAW. Despite his economic stimulation measures having a record
to date that is unblemished by success, he recently launched new attempts to
conjure-up a free lunch.
I’m referring to two measures that were announced in
March and have just started to be implemented, the first of which is the
ECB’s corporate bond-buying program (starting this month the ECB will be
monetising investment-grade corporate bonds in addition to government bonds).
This program is designed to bring about a further reduction in interest
rates, because, as we all know, if there’s one thing that’s holding Europe
back it’s excessively high interest rates, where “excessively high” means
above zero.
Unlike the situation in the US, very little corporate
borrowing in Europe is done via the bond market. The ECB’s new corporate
bond-buying program is therefore unlikely to provide even a short-term boost,
but, not to worry, that’s where the ECB’s second measure comes into play.
The ECB’s second measure is a new round of a
previously-tried program called the Targeted Long Term Refinancing Operation
(TLTRO). Under the TLTRO program, commercial banks get encouraged — via a
near-zero or negative interest rate — to borrow money from the ECB on the
condition that the banks use the money to make new loans to the private
sector.
The combination of the ECB’s two new measures is supposed
to promote credit expansion and higher “inflation”. In other words, to the
extent that the measures are successful they will result in more debt and a
higher cost of living. In Draghi’s mind, this would be a positive outcome.
In the bizarre world occupied by the likes of Draghi,
Yellen and Kuroda, the failure of an economy to strengthen in response to a
policy designed to stimulate growth never, ever, means that the policy was
wrong. It always means that not enough was done. It’s not so much that these
central planners refuse to see the flaws in their policies, it’s that they
cannot possibly see. They cannot possibly see because they are looking at the
world through a Keynesian lens. Trying to understand how the economy works
using Keynesian theory is like trying to understand the movements of the
planets using the theory that everything revolves around the Earth.
So, the worse things get in response to
counter-productive ‘economic stimulation’ policies, the more aggressively the
same sorts of policies will be applied and the worse things will eventually
get. This is what I’ve referred to as the Keynesian death spiral.
[This post is a modified excerpt from a recent TSI
commentary.]
