Doing the Same Thing and Expecting Different Results: 511 Interest Cuts and Sluggish Economic Growth

I pointed out that global policy rates are at the lowest level ever. This was even added with yesterday’s  surprise cuts from 6 nations conducted over 24 hours.

The following Bloomberg article says that even after South Korea’s actions yesterday, which marked the 511th rate cut since 2007, the global economy continues to struggle:

Global central bankers are poised to ease monetary policy even further after a wave of interest-rate cuts from India to Poland.

As Group of Seven finance chiefs gather in the U.K. today with monetary policy on their agenda, economists at Morgan Stanley and Credit Suisse Group AG are among those predicting policy makers will keep deploying stimulus amid weak global growth, slowing inflation and the need to thwart currency gains…

South Korea’s rate cut yesterday was the 511th reduction worldwide since June 2007, according to Bank of America Corp.’s tally, done before Vietnam and Sri Lanka today said they’re lowering their policy rates. While the liquidity has sent stock markets surging, it has yet to prove as effective in generating economic growth.

So far the main effects of all these cuts has been to boost asset prices. From the same article:

Equities are rallying amid the easy monetary policy. The Standard & Poor’s 500 Index (SPX) set a record level this week and the Dow Jones Industrial Average last week climbed to 15,000 for the first time. In Europe, stocks have also risen and even the yields on the 10-year notes of crisis-torn Greece have slipped below 10 percent.

511th cut has done little to the global economy:

Behind the stepped-up stimulus: Another swoon in the global economy barely five years after it fell into its deepest recession since World War II. A Citigroup Inc. gauge shows economic data in major economies began coming in below forecasts in the middle of March and the index is now near its weakest since last August.

Central bank actions have been filling in, in lieu of the government

Maxed-out budgets mean governments are also struggling to aid their economies, with those in Europe having to ease their austerity drive. U.S. Treasury Secretary Jacob J. Lew will tell the G-7 that nations should focus on spurring domestic demand, according to a Treasury official.

Some observations:

Central bankers don’t seem to understand that in economics there is such a thing called the law of diminishing returns.

Central bankers have been pushing for the same debt based consumption growth model even when most of the world has now been satiated with debt.

Central bankers from most countries appear to have synchronized their actions. In short everyone seems as doing the same thing or singing the same tune.

Central bank policies serially blow asset bubbles. 

Price distortions in the real economy from central bank policies and from other financial repression measures as well as other interventions reduce incentives for productive activities. 

On the other hand, central bank’s cheap money AND guarantees (explicit and implicit) on the financial markets encourage rampant speculations, thus driving up unsustainable bubbles.

So money shifts to speculation on financial markets rather than on investments. Thus the parallel universe: booming financial markets amidst near stagnant economies.

Yet bubbles from zero bound rates will reduce savings and capital accumulation. Such diminishing growth will impel for more easing.

This means that central banks will keep pushing zero bound rates and asset buying programs to the limits.

Central bankers have come to believe that a new order exists. The new paradigm: Sustained credit and money expansion under today’s modern central banking will have little effects on price inflation. So there are no limits for inflationism. Because of this policymaking nirvana, they have even hailed as Superheroes and demigods by media.

Central banks don’t realize of the micro effects of their policies, particularly that each bursting of the bubble shrinks the real economy and makes them vulnerable to price inflation. The coming crisis will likely reveal more signs of this.

So central bank policies will keep inflating on more asset bubbles that will become systemically bigger until the system cracks.

Central banking bureaucracy have assumed political supremacy over the elected governments through the intensification of monetization of government debts.

As Chicago University John Cochrane aptly notes: (italics original)

Modern financial systems are fine. Modern political systems have abandoned rule of law in favor of a monarchic rule by discretion of appointed bureaucrats. That is incompatible with any financial system.

Since actions of governments of crisis stricken nations have partly been shackled from too much debt, the next phase will not only be central bank easing but will soon include direct confiscation of savings (pensions and depositors).

Media doesn’t seem to recognize that all these signify as doing the same thing over and over again and expecting different results.

The lesson from the above: People believe in insanity and in lies.