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Source link: http://archive.mises.org/3684/what-low-interest-rates-dont-ensure-economic-prosperity/

What? Low interest rates don’t ensure economic prosperity?

June 7, 2005 by

The president of the European Central Bank, Jean-Claude Trichet, is “perplexed” that the Euro-zone economy is growing slowly despite low interest rates.

Trichet was also perplexed that, with bond yields at their lowest level since at least World War I and inflation-adjusted short-term rates at zero, growth in the 12-member euro zone was modest and consumers and businesses were low on confidenceSince its inception the ECB has almost constantly pursued a policy so inflationary that they have nearly always exceeded their targets of money supply (M3) growth of 4.5% and consumer price inflation of less than 2% and they do so now currently too. The ECB chief now says he is “perplexed” that a consistently inflationary policy don’t ensure high growth. If he had been more aware of sound economics he would have known that inflationary policies only produces a short-term boost. The long-term effect are most likely directly negative, so the stagnating are hardly surprising given the fact that the current policy is roughly equally inflationary compared with what it has been in recent years and the fact that western Europe -particularly Italy and Germany- suffers from deep structural problems unrelated to monetary issues.

The sad part of this is that Trichet in the context of “mainstream” debate is actually a relative hard money advocate. He has so far rejected the consistent calls from everyone from the IMF, the OECD, The Economist and leading politicians from Germany, France and Italy to lower interest rates further. If the European economy weaken further however, I suspect that he will give in to the demands for an even more inflationary policy.

{ 5 comments }

Paul Edwards June 9, 2005 at 2:08 am

Hey Stefan: Is there a web page similar to http://federalreserve.gov/ that provides something like the US fed’s weekly play-by-play on its open market activities, only for the ECB’s activities? (Assuming that is how the ECB increases reserves for the banks over there)? I have been interested to follow it and see how its behavior stacks up against our fed’s.

Are there any countries presently whose central banks are notably better behaved than the fed and the ECB?

Thanks a million!

Stefan Karlsson June 9, 2005 at 10:34 am

Paul, the ECB home page is http://www.ecb.int

I haven’t been able to find any statistics over its balance sheet or the monetary base, but they do publish a monthly report on the money supply:

http://www.ecb.int/press/pr/stats/md/html/index.en.html

You wonder if there are any central banks which are notably better than the Fed and the ECB. As far as I know, there aren’t any who are significantly better.

Maybe the Swiss National Bank,who during the last few decades has had the best track record of increasing the money supply at a relatively low rate could be considered somewhat better.

In recent years money supply has increased even slower in Japan and prices have generally fallen there, but that is not really due to any relative hard money ideology at the Bank of Japan but rather due to the unwillingness of the public to take bank loans which have cancelled out much of the increase in the monetary base in Japan.

Paul Edwards June 9, 2005 at 11:17 am

Thanks Stefan. That’s helpful. The Japan situation you’re describing is also very interesting. Does that mean that the Japan banks do not compensate for the public’s lack of borrowing by purchasing securities? The reason i ask is (it just happens) that i was reading Rothbard’s “Lessons of The Recession” (pushing on a string) in Making Economic Sense last night and he indicated that the Japan situation you mention had only occurred once and that was during the Great Depression:

“What deflationists always overlook is that, even in the unlikely event that banks could not stimulate further loans, they can [p. 248] always use their reserves to purchase securities, and thereby push money out into the economy. The key is whether or not the banks pile up excess reserves, failing to expand credit up to the limit allowed by legal reserves. The crucial point is that never have the banks done so, in 1990 or at any other time, apart from the single exception of the 1930s. (The difference was that not only were we in a severe depression in the 1930s, but that interest rates had been driven down to near zero, so that the banks were virtually losing nothing by not expanding credit up to their maximum limit.) The conclusion must be that the Fed pushes with a stick, not a string.”

From this, would you say that these are also the conditions in Japan right now, it just doesn’t pay the banks to expand credit because interest rates are near zero.

Stefan Karlsson June 10, 2005 at 9:51 am

“From this, would you say that these are also the conditions in Japan right now, it just doesn’t pay the banks to expand credit because interest rates are near zero.”

Yes, and I think also the banks in Japan have wanted to increase their reserves because of the large amount of bad loans they piled up during the bubble years.

Graeme Bird April 12, 2006 at 11:00 am

But aren’t they all so locked into that Keynes/flirtation with Gesel framework?

Cannot handle inductive or apriori thought. So they stick to the numbers. That’s safe isn’t it? And the numbers say that more loanable funds will be lent out at a lower interest rate.

But the fundamental issue is:

What proportion of resources is going to be directed to current consumption and what proportion to future consumption.

This they do not see when they tally up total investment loans that they are trying to manipulate.

All it leads to is an unfair low-yield world. Where asset prices are so high with such low yields that folks with already deep pockets are comparatively more advantaged.

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