Europe is not growing much because most of its economies have been crushed under a mountain of debt, taxes, welfarism and statist dirigisme. Yet somehow the foolish pettifogger running the ECB thinks that driving the cost of money to the “lower bound†(i.e. zero) will help overcome these insuperable—and government made—barriers to prosperity.
Yet in today’s financialized economies, zero cost money has but one use: It gifts speculators with free COGS (cost of goods sold) on their carry trades. Indeed, today’s 10 basis point cut by the ECB is in itself screaming proof that central bankers are lost in a Keynesian dead-end.
You see, Mario, no Frenchman worried about his job is going to buy a new car on credit just because his loan cost drops by a trivial $2 per month, nor will a rounding error improvement in business loan rates cause Italian companies parched for customers to stock up on more inventory or machines. In fact, at the zero bound the only place that today’s microscopic rate cut is meaningful is on the London hedge fund’s spread on German bunds yielding 97 bps—-which are now presumably fundable on repo at 10 bps less.
Needless to say, when your only tool is a hammer, everything looks like a nail. And when you are a Keynesian with a hammer, it is presumed that nothing much was hammered before yesterday. That is to say, the whole mindless drive by the ECB toward the zero bound, which Draghi pointedly claimed to have achieved this morning, presumes that balance sheets—–the accumulated record of past actions—don’t matter.
Instead, its all about the credit “flow†today and tomorrow. Accordingly, lower interest rates—no matter how trivial the change—are ritualistically presumed to stimulate more borrowing in the real economy, and therefore more spending, income and virtuous circle of Keynesian growth.
