Mario Draghi’s sunset retirement festivities weren’t supposed to have gone off this way. Celebrated for his July 2012 “promise” to save the euro, he instead spent the entirety of his eight years as President of the ECB chasing inflation and recovery, the very things meant to accomplish the euro’s saving, without success. By the end, his final act in September 2019 was to restart QE all over again, putting him like Europe right back at the start.
It’s why, when it comes to “stimulus” like QE, the goalposts must always be moved. Such “massive” monetary “accommodation” in theory produced so little in economic reality it’s judged mostly by the jobs the program allegedly “saves.” This is true everywhere it’s ever been tried, which is pretty much the entire planet. In other words, Economists think it worked, but because it didn’t, they suspiciously carve out a slice just underneath and claim that surely without QE or its ilk, as bad as things are, they would’ve been even worse.
So when the ECB went back to QE in September last year with the whole global economy facing another “unexpected” downturn, it was a ridiculous proposition. Europe as a whole had been shuffled in the recessionary direction the entire time QE had been in place during 2018. What real difference would restarting it make?
As I wrote at the time, the Jaws analogy seemed appropriate:
What must the angry class of Europeans think? This is “their” big solution, the establishment will reward and promote the person who has been the face of the biggest financial disaster in the IMF’s history. And her first semi-official act is to, channeling fictional Amity Island’s fictional police chief Martin Brody, recoil in horror at the size and danger of the economic shark circling their shared vessel and plead with European authorities for a bigger boat.
Always more. Why? Because it never works, Europe’s pre-COVID slide right into recession another proof for this fact. September 2019’s QE restart did nothing to prevent the ultimate contraction.
Having suffered amplified pressures from shutdowns related to overreacting to COVID, things are, obviously, materially worse now than last year around this same time. And yet, what are European officials offering in the wake of even more devastating economic losses? Not even a bigger boat.
That’s the thing about QE’s; they are supposed to dazzle you with particularly their size. But if you shift your viewpoint sideways just a little, you witness how from any other perspective the boat’s not any bigger at all. It’s all an illusion.
Christine Lagarde’s ECB, the face of the IMF’s biggest financial disaster (Argentina 2018), has put the central bank’s figurative foot to the even more figurative pedal. As of the latest weekly figures, Europe’s central bank has created €2.91 trillion in bank reserves posted to the official “current” account in addition to the €594 billion stuck in the “deposit” account punishing (NIRP) banks doing QE business with it.
Those bank reserve balances derive from the purchase activity (asset swap, not money printing) of the ECB’s two major QE-type programs, the PSPP (the original QE begun in April 2015) and the new-ish PEPP (the pandemic response version begun earlier this year). The first has purchased a net €2.3 trillion in bonds while the latter has bumped just shy of €700 billion.
No matter what size, doing more QE or the like is the same boat too small to successfully wrestle Bruce from eating the vessel’s human contents. The ECB, like Chief Brody, is hoping for a one-in-a-billion deus ex machina to save Europe; only there aren’t any volatile oxygen containers conveniently placed perfect so as to drop right in and stick within the shark’s gaping mouth-hole. Until its stumbling, bumbling policymakers discover this, well, there’ll be plenty of jobs to save in the meantime.
None of this stuff works: flash estimates for European inflation are still some of the worst on record even given those figures cited above. Core inflation, the harmonized rate excluding food, energy, and tobacco prices, has been pinned at the lowest on record for three straight months now.
But this isn’t merely a European disaster; that much even the Europeans are quite normalized to. Instead, after having suffered greatly with a pre-COVID downturn and then a post-shutdown calamity, Economists worldwide tell us that this “jobs saved” business has been somehow “vindicated.” Seriously:
Governments have been vindicated in the support they provided to shield people and firms. With rock-bottom interest rates expected to persist, governments can and need to sustain it to prevent long-term scarring effects of this crisis. The economic consequences will be with us for years to come. Governments must address decisively the effects on the most vulnerable, especially children and the young.
Those were the words of the OECD’s Chief Economist Laurence Boone who, in that organization’s latest update to its forward-looking estimates, tells us that we’re in very bad shape next year and beyond.
And, quite naturally, the way Boone and the OECD frame this sobering warning is with the schizophrenic ravings of madmen:
It’s insufferable to the point of open dissonance; especially when you consider the OECD’s main economic message, delivered in a dose of hard numbers (below), isn’t anything like “hope.” Estimates for economic growth next year were just substantially lowered, but even that isn’t the main problem.
The real shark here is that even in the best scenario conjured up by these models, the global economy does not recover. Let me repeat that again: the global economy is not expected to recover.
Hope sounds (and appears) quite a bit different in this context even though it supposedly shares the same context:
Despite the huge policy band-aid, and even in an upside scenario, the pandemic will have damaged the socio-economic fabric of countries worldwide. Output is projected to remain around 5% below pre-crisis expectations in many countries in 2022, raising the spectre of substantial permanent costs from the pandemic. The most vulnerable will continue to suffer disproportionately. Smaller firms and entrepreneurs are more likely to go out of business. Many low wage earners have lost their jobs and are only covered by unemployment insurance, at best, with poor prospects of finding new jobs soon.
This is the same guy! Those words are taken from the same booklet as the “hope” cover shown above! We’re gonna need a bigger boat, alright.
Not so, says the QE-clan. They’ll just save some more jobs and call it a day. Like the first and second times we did this (2008 and 2012), ¯_(ツ)_/¯. What do they care if the economy ever really recovers? They always fail upward; Christine hardly the lone outlier.
Chock full of past QE’s and fiscal band-aids, the forward outlook in almost every major economy is (below) below trend growth anyway. In most cases, the OECD’s leading indicators were in October 2020 still among the lowest in each series – including the one for the US.
The world got overexcited in the first few months of reopening, swallowing the gigantic positives that it quite necessarily created as if meaningfully more than those numbers represented. These were extrapolated wildly into fantasies of a quick and easy full-blown “V”-shaped recovery. Worse, the extrapolations were largely predicated on the view of “stimulus” being so much more effective than saving a few jobs.
People really believed stimulus would, you know, stimulate.
But now that we need more “stimulus”, the “stimulus” providers are flat-out admitting to you that it won’t lead to recovery; again, shark’s just too damn huge. There are no bigger boats, the central bank marina only carries the clearly insufficient members of the one class.
The implications are not strictly economic in nature, nor will they be limited to Europe’s cobbled jurisdictions. This is right where the lack of “stimulus” being anything real and tangible leaves for everyone to ponder the same sorts of problems as we’ve seen countless times before, including March 2020. Low bond yields resisting the overwhelming inflation-is-guaranteed narrative are looking instead in this direction:
The toll on the economy could be severe, in turn raising the risk of financial turmoil from fragile sovereigns and corporates, with global spillovers. [emphasis added]
That was Boone’s way of saying the vaccine better work and work so well that we reach the OECD’s “upside scenario.” If it doesn’t, spillovers in corporate bond markets, well, you remember March.
But that’s the thing he doesn’t necessarily consider, nor, apparently, does anyone currently euphoric over the next round of “stimulus” (such as today in the US). The amount of economic damage even at the OECD’s upside is enough to create all sorts of self-reinforcing problems at a monetary level (repo). If not like March 2020, then in many ways similar to what happened in 2011-12 (global dollar shortage in ’11, full extent of economic damage not fully appreciated until later in ’12).
When the best case is truly a worse case, we can’t afford to sit around waiting for the only answers to be more “jobs saved.” We don’t need a bigger boat, or even a different boat. We need to get the global economy the hell out of the water filled with all these Bruces. This, as we’ve seen for thirteen years, is simply beyond the comprehension and therefore capabilities of the current sorry cohort of global officialdom.
The same “authorities” who dare sell you hope as if it could ever be the same thing as a global economy that never recovers.
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