Thursday, July 26, 2012

The Fed and The ECB

It's amazing what people will believe.

With the US economy sledgehammered by an unfriendly legal, tax and regulatory environment, the Fed is going to be able to do something about it?  What?  Lower interest rates?  Buy bonds and expand the nation's indebtedness?  Are our debts too low that they need expanding by the Fed?  How do you convince a businessman to hire someone in this environment?  Have the Fed buy Treasury bonds?  Is this a serious discussion?

How about Europe?  Mario Draghi announces that the ECB will do everything in its power to keep the Euro from falling apart.  Really?  By lending countries more money?  Is that the ticket?

No macroeconomic solutions will solve the problems in the western economies.  The microeconomic situation is not favorable for hiring.  Employees are, relatively, far too expensive compared to other factors of production and compared to countries in Asia where labor is not loaded up with government goodies that makes them toxic to employers.  So, western labor is doomed.  It's that simple. 

The only macro policy available is to make drastic cuts in entitlement programs, something no one is even considering doing.  Absent cuts in entitlements, no western nation can survive bankruptcy.  It is simply a matter of time.

So what role do these central banks play?  In reality, they have about as much to do with the real economy as astrologers (who are much more entertaining).  Central banks can impact the money supply and that's about it.  Increases in liquidity don't help economies that are mired in sovereign debt problems, though it may buy some time until everyone figures out the total irrelevancy of the central banks.

There is nothing the ECB can do about the sovereign bankruptcies that are in Europe's future, except perhaps hasten Germany's inclusion in the list of those who will ultimately default.  The real reasons for the current problems are: 1) over-regulated and over-taxed economies; 2) entitlement programs for retirement and health care.  No one is discussing fixing either 1 or 2.  Since those are the main drivers of the current problems, it is easy to see where this is headed and the central bank conversations are beside the point.