EC Inflation-Spewing Dragon

Dovish Cooing from the Desolation of Draghi

As Reuters informs us, on the heels of Mr. Draghi’s somewhat “disappointing” attempt to assassinate the euro on occasion of the previous ECB meeting, the chief European printing press supervisor and certified monetary crank has decided to assure everyone of his ultra-dovish stance again on Thursday, by announcing that even more monetary insanity must be expected soon:

“Fading growth and inflation prospects will force the European Central Bank to review its policy stance in March, President Mario Draghi said on Thursday, a strong signal that more easing could be coming within months.”

The economy isn’t doing well? Let us set fire to the currency then, maybe that will help.

Still not enough inflation! Euro area M1, a close approximation of the true money supply. Currently this aggregate is growing at roughly 14% p.a. This is the actual rate of inflation. Rising consumer prices are merely one possible consequence of inflation, and not necessarily the most pernicious one. Moreover, consumer price inflation can often appear on the scene with a very long lag (many years)

Here are a few more excerpts from the Reuters article:

“Downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks,” Draghi told a news conference. “We are not surrendering in front of these global factors.”

Dismissing concern that the ECB’s policy arsenal is all but empty, Draghi said: “We have the power and willingness and determination to act. There are no limits to how far we are willing to deploy our (monetary) instruments.”

(emphasis added)

Two things are worth noting regarding the sentence highlighted above: first of all, it is absolutely true that people who assert that central banks “have run out of bullets” are all wet. How can one possibly “run out” of something one can create from thin air at a keystroke?

Secondly, it shows that Draghi and the merry pranksters at the ECB Council are not only well aware that there are no theoretical and practical limits to their monetary depredations, but they seem fully prepared to “go the whole hog”.

Naturally, it once again remains unexplained just how the printing of additional money with the explicit goal of making life more expensive for consumers (while creating price distortions across the economy) is supposed to increase prosperity. Just reflect on the sheer absurdity of this notion for a moment.

One of the perverse outcomes of the ECB’s policies: Yields on Germany’s 2-year notes have decline to a negative 0.45% – lenders to the government are thus guaranteed  to lose money. It is as if the arrow of time had been inverted or suspended – superficially it appears as tough the categories “sooner” and “later” no longer mean anything. An economy receiving such extremely distorted interest rate signals is bound to be hollowed out on a structural level. Eventually this will lead to another big bust

The Road to Economic Hell

These bureaucrats believe that the economy can be magically improved by creating additional money units ex nihilo, which is an eerie reminder of the French revolutionary assembly’s adventures in monetary debauchment in the late 18^th century, an exercise that managed to drive France into a state of utter economic ruin.

The revolutionaries created and destroyed two currencies in a row within just a few years. As transcripts of their debates show, initially they had a few doubts as to the wisdom of this course. However, once they had embarked on it, they found it impossible to extricate themselves from the policy. In the end they went down the road to economic hell in ever greater strides. Mindless propaganda and State terror soon replaced reasoned debate.

Revolutionary funny money: in theory “backed” by land that was confiscated from the church, the initial issuance of this money gave the economy a brief “shot in the arm”, but as soon as the inflationary push ceased, the economy contracted again, falling into a worse state than before. And so they kept printing, until both the currency and the economy lay in utter ruins. And then they did it all over again with yet another currency (the mandat), because they thought they had “learned their lesson”!