It’s official: the Bank of England and the European Central Bank announced a policy of guaranteed counterfeiting on a permanent basis. They will keep short-term interest rates low for years. They did not say for how many years. Commentators guessed into 2015.
The promise of unlimited counterfeiting pushed up European stock markets. Investors love counterfeiting. They think societies can have economic growth with low short-term interest rates created by fiat money. The idea of a free market in money terrifies them. They believe in government counterfeiting.
This joint announcement makes it clear that Europe’s central banks have no exit policy, any more than the Federal Reserve does. The West is on the back of the tiger. So is Japan.
China’s central bank is the main inflating central bank. Its recent attempt to stop inflating pushed up short-term rates and is cooling the economy. It now threatens to collapse the real estate bubble that has built up for a decade.
Once a central bank adopts monetary inflation, it cannot stop without creating a recession. Europe’s central bankers have decided that they prefer risking price inflation as opposed to recession.
Short-term rates will be held at 0.5% in the UK and the Eurozone. This is close to free money. This will enable banks to borrow short and lend long, pocketing the difference. Problem: the banks are not taking the bait. They refuse to lend all of the money they are legally allowed to lend. They imitate American banks. They build up excess reserves at the central banks, just as American commercial banks do here. They are afraid of a repeat of 2008-9. They prefer to avoid lending. So, the economies do not boom. Europe remains in recession. Prices do not rise. Stagnation is universal.