Europe’s leading economic policy makers have officially thrown in the towel.
Last week, the European Central Bank admitted economic conditions are so dire that it already has to reverse its monetary policy.
I’ll get back to that in a minute…
Following the Great Financial Crisis in 2008, central banks printed trillions of dollars and pushed interest rates to their lowest levels in human history. Low interest rates (and lots of new money sloshing around the system) mean people should go out and buy things that would otherwise be out of reach… new houses, new cars, businesses, etc.
And, in theory, all of that activity creates jobs and helps the economy grow… in theory.
Ten years into this monetary experiment, central banks did create growth…
US Gross Domestic Product (GDP) was about $15 trillion in 2008. Current GDP is about $22 trillion. That’s $7 trillion of economic growth.
Impressive… until you figure the cost of that growth.
Over the same period, the US national debt increased from $10 trillion to $22 trillion.
So, it took $12 trillion of debt to create $7 trillion of economic growth.
The marginal utility of all of this new debt is decreasing (remember this point for later). And it’s the same story all over the world.
The US economy is so dependent on cheap money, it can’t even handle 2% interest rates (the Fed hiked rates from 2.25% to 2.5% last December and stocks fell 20%).
But Europe is even worse. Europe has negative interest rates. And the European economy is so weak (it grew 0.2% in Q4), it can’t even handle ZERO percent interest rates.
Last week the ECB announced it would keep interest rates negative. And it’s starting its third round of cheap loans to banks (who, in turn, are supposed to lend to businesses and households).
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