A call to arms for central banks

Jun 16, 2012·Alasdair Macleod

The rate at which the majority of the eurozone is descending into insolvency is accelerating. The rescue package for Spanish banks, which appears to have been provisionally set at a figure designed to impress the markets, hardly even produced a dead-cat bounce. All it has achieved is to draw attention yet again to the helplessness of the authorities in dealing with multiple debt-traps. So what is the answer?

It depends on the purpose behind the question. If it is to seek a genuine solution, then the answer is to cut public spending rigorously in all countries that depend on markets to fund budget deficits or to roll over existing debts. Only a convincing budget surplus is going to lead to falling borrowing costs. The objection to this solution is partly political and partly on the grounds of neoclassical economic prejudice. The former persists in placing social objectives above economic objectives, while the latter has been convincingly proved to be wrong. Otherwise, please talk us through how a government actually knows best to kick-start an economy into recovery, without ignoring the accumulation of past evidence. Explain why it is that those countries, driven by the consumption so loved by Keynesians and monetarists alike, have turned into basket-cases, while economies driven by a savings culture persistently confound all neoclassical theory by making their citizens better off, in every case.

The answer is that government intervention is destructive. Taxation and regulation are the tools by which government disrupts the primary social function of humans exchanging their labour for mutual benefit. Government is no substitute: its desire, consciously or unconsciously, is to control people’s lives for its own social objectives. This is the motivation behind the destruction of savings and their replacement by an accumulation of debt; and for the government itself, there are mounting future liabilities. Reversing an accumulation of past interventions, which is necessary if a country’s fortunes are to be improved sufficiently to escape complete bankruptcy, goes counter to every reason a modern politician enters his trade.

So it is more likely that the purpose behind the question posed is to find a solution without cutting public spending, and if possible allowing it even to increase. For this reason, Keynesians and monetarists continue to be employed despite their abysmal record. So an alternative to facing up to reality will be found, and the clue, as Sherlock Holmes observed, is in the dog that did not bark in the night.

Despite signs from everywhere that major economies are stalling, it has been odd that the major central banks have not indulged in more quantitative easing. One could argue with some conviction that this is because it has not had the desired effect, and that for one country to do so would risk undermining its currency. But there is possibly an alternative reason: that the major central banks are watching the European crisis with the growing realisation that the eurozone is about to crash with horrible consequences for all. The only, final, solution will be a co-ordinated round of multiple quantitative easings, joined in by the European Central Bank, when the outcome without it would obviously be so dire that not even Germany can object.

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