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Mario Draghi
Image: Remy Steinegger

Central bank policies are killing the economy

Hedge fund tycoon Crispin Odey and Societe Generale strategist Albert Edwards have both separately warned that another banking crisis is looming; and both believe central bank monetary policy is to blame.  According to Odey bank profitability is falling:

“Banks need rights issues to deal with these losses but why would anyone want to subscribe while… margins are driven lower by ongoing quantitative easing.  Only higher interest rates can make banks attractive.”

Instead, central bankers continue to use quantitative easing and zero-percent interest rates in the desperate hope of stimulating bank borrowing.  But Edwards argues:

“Quick-fix monetary QE nonsense has made virtually no difference to the economic recoveries other than to inflate asset prices, make the rich richer, inequality worse and make Joe and Joanna Sixpack want to scream in rage.

“I am neither monetarist nor Keynesian. I see merit and demerit in both sides of a very fractious argument. But what I do know is when in the last few weeks I have heard that Janet Yellen sees no bubble in the US, when Ben Bernanke hones and restates his helicopter money speech, and when Mario Draghi says that the ECB’s policy of printing money and negative interest rates was working, I feel utterly depressed (I could also quote similar nonsense from Japan, the UK and China). I have not one scintilla of doubt that these central bankers will destroy the enfeebled world economy with their clumsy interventions and that political chaos will be the ugly result.”

Writing for Money Week, John Stepek points to the lunacy in Mario Draghi’s negative interest rate policy – which the US Federal Reserve has been openly considering.  The only way to make this work is to abolish notes and coins:

“Banning cash enables central banks to impose negative interest rates (at the moment, if they make them too negative, then people will just hold loads of cash under their mattress at 0% annual interest instead of negative 4%). That means they can kickstart the economy and fight deflation more easily.”

In practice, were a central bank to seriously consider outlawing the use of cash, the psychological impact on an already stressed economy would be catastrophic:

“It’s funny. Some of the same people who argue that Brexit would be disastrous for confidence and “uncertainty” will cheerily dismiss the impact of something far more significant like banning cash.  Yet banning cash in itself – regardless of the accompanying justifications – would be seen as so dramatic and draconian that it would almost certainly have a significant impact on people’s ability to make big buying or selling decisions.”

Arguments against central bank policy have been growing in volume since the crisis of 2008 – indeed, many people at the time argued that banks had to be allowed to fail even if this led to mass bankruptcies because this was the only means of resetting the system.  Having alighted on bail-outs (and more recently bail-ins), quantitative easing and zero-percent interest rates instead, central bankers are now caught in the psychological trap of previous investment.  To U-turn at this point would be to admit that the eight years since the crash have been wasted.

The views of investors like Odey and Edwards and journalists like Stepek are nothing new.  What is new is that these voices are beginning to get a hearing in mainstream media, and that investors are paying attention.  In this sense, they are like the little boy who points out that the Emperor has no clothes – they are merely pointing out the obvious; that central bank policy has failed.

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