Structural Failure and QE and ZIRP

If the world’s central bankers are successful in pursuit of their short-term goals by the use of Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP) -- winning the race to the bottom in currency devaluation to the cheers of economically dogmatic, faux-literate media -- these bankers can’t then avoid being failures over the intermediate and longer terms in the race to attract productive, job creating investment.

This appeared on April 10 in

Global central banks cut their euro holdings by the most on record last year to help mitigate losses ahead of the European Central Bank's (ECB) QE. The euro now accounts for just 22% of global reserves, down from 28% before the EU's debt crisis five years ago, according to the International Monetary Fund (IMF). "As a reserve currency, the euro is falling apart," says SocGen's Daniel Fermon. The numbers may be music to (ECB Chairman) Mario Draghi's ears -- a cheaper currency is theoretically a more competitive one.

There is no argument now that what has been and is currently missing from the global economic recovery is private market investment in the means of production -- land, building, equipment, productivity-related technology, and software. Attempts in the last 7 years by governments to tax, print, borrow, and regulate their way to prosperity are ever more clearly the reason that this private market investment has been and is being delayed, deferred and cancelled.  No sane corporate manager invests long term into a currency that is being persistently undercut by official doctrines -- QE and ZIRP -- nor into an economy undermined by unpredictable waves of regulation and potentially confiscatory tax regimes. This cause and effect is now being denied only by the most dogmatic of progressive ideologues and blindest “social economists”. 

Despite the obvious, the central bank of every major country on the planet currently has one or both of these programs in force. The U.S. Fed has, to it credit, ended QE. It is clear, however, that ending ZIRP is going to be a difficult and painful process. And there are more than a few smart observers who think ZIRP will never voluntarily end in the U.S. -- nor in Japan, nor in Europe. Their judgment is that the pain of allowing the free markets to retake control of the level of interest rates of intermediate and long maturity bonds, called ending ‘financial repression’, will prove unbearable. One need only imagine the bipartisan political panic were the interest paid by the U.S. federal government on its debt to double or triple, squeezing out hundreds of billions of dollars of spending on military and social programs.

It is becoming ever more obvious to ever more people that sustaining these 'financial repression' policies is making economies ever more comatose; ever less dynamic. Exactly when the accumulating long-term economic damage becomes more onerous to central bankers and politicians than the short-term damage of ending QE and ZIRP can’t be known.  But that inflection point will come, desired or not; willed or not.  It is not avoidable.

Michael Booth, often posting and commenting as Cato, lectured in finance and economics at the Univ. of Texas, and worked for 20 years as an independent contractor and managerial trainer on financial topics in the technology industry.