The omnipotent PhDs leading the world’s central banks equate economics to physics. Like Newton’s laws of motion, an economy at rest will remain at rest unless compelled to grow by some outside force. Enter the Fed, European Central Bank and Bank of Japan, which have collectively added more than $20,000,000,000,000 worth of asset purchases globally since the onset of the Great Recession.
This endeavor has been fundamentally misguided from the start says economist, author and Tressis CIO Daniel Lacalle. In his latest book “Escape from the Central Bank Trap,” he dissects what central bankers can and can’t do, while providing some healthy advice toward finding a better way.
In this latest edition of our Real Conversations video series, Lacalle joins Hedgeye CEO Keith McCullough for a frank discussion about central bankers and the growth setup for U.S. and European economies.
Lacalle offers some particularly interest insights about France and Italy. As a European-based economist, Lacalle is extremely skeptical of France’s newly-elected President Emmanuel Macron. In particular, he questions whether the self-described reformist will drastically alter France’s love affair with Socialism:
“The first position Mr. Macron has taken was to nationalize a French port because the Italians were going to buy it. Is that the reform that we’re thinking about? There’s been no labor market reform. There’s been no public sector reform. Their public sector is one of the largest in the world (about 22% of the workforce). It’s a very directed economy. If the first decision of an allegedly free-market oriented leader is to nationalize a port, I think that we should be a little bit skeptical about saying it’s going to be different this time.”
In his book, Lacalle is equally pithy. Here are two quotes from the book (bolded) along with his additional commentary (italicized) from the video above:
1. “Central Bankers cannot print growth.”
“What central bankers can do is provide liquidity and generate a level of backstop in the markets in an environment of panic. But what they cannot do is make people decide to invest or force consumers to be more confident. The first thing people are not is amnesiac and the second thing they’re not is stupid. Everybody perceives reality and interest rates so low are an anomaly … They also see extreme liquidity and it’s not changing the perception of overcapacity and companies instead of investing they buy back shares and use that extra liquidity to increase dividends. It makes absolute sense.”
2. “Cheap money becomes very expensive in the long run.”
“With all this massive liquidity, what happens is that all that money is going somewhere, and we don’t pay attention to it because it’s not making prices rise. However, it is creating very perverse incentives. We’ve seen in the latest Bank of international settlements report that zombie companies are going through the roof and how excess capacity and excess debt are perpetuated. Instead of helping deleverage, low interest rates incentivizes more debt and more risk taking. Imbalance between risk and price signals.”
This is a must-see interview from an economist who is also a market practitioner, a skillset combination sorely absent from the résumés of our illustrious central bankers.