If the European Central Bank (ECB) is to be believed, the biggest threat from the Middle East is not Iran getting nukes, it’s Saudi oil.
What’s the big deal? Saudis have had a cushy lifestyle for decades, thanks to their oil production, but U.S. fracking is making the U.S. practically oil independent and that’s cramping the Saudis’ lifestyle, so the country has turned on the tap, producing more oil, which lowers prices, which makes it less profitable for American companies to use fracking techniques to drill for oil.
Unfortunately, lower oil prices have made it difficult for central bankers to increase the rate of inflation, which has this goal-oriented group in a snit. OMG!!!
“Government debt gdp” by Jirka.h23 – Own work. Licensed under CC BY-SA 3.0 via Commons.
Not to worry. Oil prices jumped a whopping 27% last week, in spite of Saudi vows to continue current production levels, in part based on the announcement that Russian President Vladimir Putin would meet this week with Venezuelan President Nicolas Maduro to discuss “possible mutual steps” to stabilize oil prices.
Apparently, central bankers missed that news, because when the ECB met last week, inflation was the focus.
Low Inflation Is the Problem
How many people do you know who are worried that the rate of inflation is too low?
If you know anyone who thinks the most important step forward for today’s tepid economy is to raise the inflation rate to 2%, there’s about a 100% chance that person is a central banker.
Central bankers are the folks who have been running the economy in recent years and, based on their logic (or, more accurately, illogic), it’s a wonder there still is an economy.
Everything wrong with the U.S. economy today is even worse in Europe. Unemployment has been so high, it’s as if every month is August. For the Eurozone as a whole, the unemployment rate is 11%, which is twice the official rate of the U.S. Much of Europe has been in and out of recession as often as Lindsey Lohan has been in and out of rehab. And national debt exceeds 100% of gross domestic product (GDP) in many countries and is approaching that level in others.
Remember a few years ago when Europe’s economic woes were being referred to as a “sovereign debt crisis?” Euro-debt has only increased, but few people even refer to sovereign debt anymore.
The real problem, though, according to ECB President Mario Draghi is that inflation is too low. The rate of inflation for Europe is currently just 0.2% and since the Federal Reserve Board has a goal of 2% inflation, apparently the ECB has to have the same goal.
To meet that goal, Draghi gave a “strong signal” that the ECB will expand its quantitative easing program. The ECB is less than a third of the way through its current QE program, which calls for the purchase of EUR 60bln per month until September 2016 – and it’s already signaling more stimulus.
Maybe European central bankers just need to multiply everything by 10. If purchasing EUR 60bln a month pushed the inflation rate to 0.2%, just add another zero. Purchase EUR 600bln in bonds per month and you’ll land right at 2% inflation. That ought to work.
Or maybe it won’t. Easy money policy, interest rates at or even below zero and economic “stimulus” in the form of bond buying, forward guidance and other central bank tricks have failed to tame unemployment, spur economic growth or boost inflation. So why do central bankers think that more of the same will work?
Here’s an idea. Maybe instead of letting central bankers steer the economy, political leaders can take charge and focus on tax reform, spending reductions and deregulation. Unfortunately, that has as much of a chance of happening in Europe as it does in the United States.