Is there a way out of the next financial crisis? Can more printed money or austerity save us all?

Every time Mario Draghi, the President of the European Central Bank, tries to fight very low inflation and indirectly support growth and job creation in Eurozone with monetary measures, the Germans stand in his way. Last Thursday 28 January, Jens Weidmann, the governor of the German central bank the Bundesbank, did it again. In an interview to Frankfurter Allgemeine Zeitung he warned Draghi “not to go too far with government bond purchases”. One week earlier the President of the ECB had left it to be understood that the Eurozone central bank could do more. However, there are other, global dimensions to it. Let’s start the story from the beginning. Printing more euro On Thursday 21 January Mario Draghi, had said clearly that, “Yet, as we start the New Year, downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks. In this environment, euro area inflation dynamics also continue to be weaker than expected. It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March”. Obviously he meant, that in view of the clear worsening of the world economic climate, the increased uncertainty in the financial and commodity markets and the growing geopolitical risks after the beginning of the year, the ECB feels obliged to inject more cash into the system, by increasing its purchases of Eurozone government bonds. The primary target is always to fight the persistently very low inflation that torments Eurozone for many years now. Of course, an indirect but more important target is to revive the stagnant real economy, by injecting freshly printed money to the system. At least this is what the markets understood on Thursday 21 January and hiked for one day or two. Draghi, on that day, had also, for the first time given a hint about the size of the last cash injection decision. In detail and concerning the monetary policy relaxation measures decided last December at ECB’s Governing Council, he said while answering a journalist’s question: “Those measures, by the way, in December, were quite significant. If one goes back, our extension of the APP (asset purchase program) and the decision to reinvest is going to add €680 billion to the liquidity, and it’s an amount – I don’t think people have reflected enough – it’s an amount that’s about two-thirds of the original size of the program”. Going up to €2 trillion To be reminded that ECB’s government bond purchase program, which constitutes the largest part of the APP, started last year with monthly bond purchases of €60bn and an overall target of €1.14 trillion to be spent up to September 2016. According to Draghi, last December this program was prolonged until March 2017 and increased by €680bn. It’s highly possible then that this March, during the next Governing Council of the ECB, Draghi may press on for a majority decision bringing the total APP program to anything between €1.8 and 2 trillion. This amount is so big that it has rung bells in Germany, the usual suspect to oppose ECB’s extraordinary quantitative easing monetary policy. The German central bank, the Bundesbank under its President Jens Weidmann, and the German Federal Ministry under Wolfgang Schäuble have criticized, attacked and voted negatively to all Draghi’s plans aimed at fighting deflation and stagnation with more cash injections. Nevertheless, this is exactly what all the major central banks from Beijing and Tokyo to London and Washington have been doing during the past six years. Yet the Germans still believe that only hard labor can produce more growth. As for deflation they have repeatedly argued that there is nothing wrong about the inflation rate being stuck in the zero area. Do it like the Fed In any case, ECB’s €2tn are close to the region the American central bank, the Fed, has reached with its super quantitative easing of $4.5tn. In reality, the ECB takes up the relay from the Fed in feeding the insatiable appetite of the major banking sharks more cash free of charge. This is tantamount to the western monetary system bowing to their threats. Unfortunately, it seems that the next financial crisis won’t be effectively repelled with one more euro trillion. The real problem is that those banks have ‘invested’ or lent a large part of the money they have got for free to the now faltering borrowers in the developing world. Brazil, Turkey, South Africa, Malaysia and others will find it very difficult to honor their debts with an appreciating dollar, their devaluing national currencies and their growth rates diminishing. Even the Chinese yuan/renminbi money is now devaluing fast, having already triggered a dangerous and sizeable outflow of capital from the country. If the developing economies, China included continue faltering, a prospect which is considered rather certain, the world economy cannot expect to be rescued by the deflationary and stagnant Eurozone or even the ‘mildly growing’ US economy. In the US, one after the other the Presidents of the regional American central banks are acknowledging that employment, inflation and GDP growth do not emit positive messages. In the latest occurrence John Williams, the San Francisco Federal Reserve Bank President said on 29 January that, in contrast with last December, he now sees less growth, higher unemployment and lower inflation. Money for nothing This diagnosis means that the American economy is not at its best. One side effect of that can be that the bankers will continue to usurp that $4.5tn at almost zero interest rates. The Fed would hesitate to increase its rates amidst a stagnating US. Still, this may not be enough to save us all from a new banking melt-down, despite the additional euro trillion to be handed to bankers by the ECB. Of course, this doesn’t mean, either, that Germany is right and austerity and financial orthodoxy can save the world from a new Armageddon. Berlin’s recipe will just add the dissolution of the Eurozone to a simmering financial crisis. Alas to us all, the second fallacy will prove worse than the first.