Posted by on April 11, 2020 9:45 am
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By Olivier Kessler, courtesy of ECAEF


Chances are that the current stock market drama will go down in the history books as a “corona crash”. Focusing on the trigger, however, would overlook something essential.


In retrospect, the complex and opaque developments in history are often reduced to a few specific events. This corresponds to the human need for complexity reduction and classification: one tries to see the forest despite the noisy trees. However, sometimes this simplification carries the risk of premature conclusions.


Just as the “real estate crash” of 2008 was simplified for “greedy speculators” and the euro crisis for “over-indebted Greece”, the Corona virus now threatens to become the scapegoat for the current stock market crash.


This is already indicated by statements by various governments: it is pretended that only the virus is the problem of the economy, while the structural imbalances that have been built up over many years are hidden on all fronts in the form of state-kept zombie companies and record-high levels of debt. It would be something like blaming only someone who drops a burning match after others have deliberately and widely spilled gasoline.


This interpretation would once again let the crucial accomplice slip away: the central banks. Just as speculators and the problems in Greece were just one of the many possible needles on which earlier bubbles could have burst, the corona virus is just one of many possible catalysts that deflate the markets, which have long been decoupled from real values how strong, has yet to prove itself in the coming weeks and months.


A global pandemic of this magnitude – only in combination with an oil price shock – would certainly result in a market correction even under “normal” monetary policy conditions, but the consequences in today’s bubble economy are likely to be many times more serious.


Just as the Corona virus is supposed to be really dangerous, especially for those patients with pre-existing conditions, the virus is also particularly threatening for those economies that have been suffering from monetary policy megalomania for some time – where saving for difficult times is punished by low interest rates as well as Overindebtedness and speculation were rewarded with leverage. Such a monetary policy had also caused the historic Great Depression in 1929, although this is presented differently in various textbooks.

Lessons from the Great Depression


In one of the most profound analyses of this period – in America’s Great Depression – Murray Rothbard, contrary to popular clichés, showed that the Great Depression was caused by the expansionary monetary policy of the US central bank. The money supply was expanded by a whopping 62 percent between 1921 and 1929, which did not create consumer price inflation, but created a bubble in the financial markets. Parallels to today are obvious.


The Federal Reserve (Fed) itself admitted that its monetary policy was responsible for the global economic crisis. In his most extensive study, together with Anna Schwartz, Nobel Laureate Milton Friedman took the view that there would have been no major depression without the Fed. Under the previous competitive monetary system, the private banks clearing house would have eased the situation quickly.


In a speech in honor of Milton Friedman on the occasion of his 90th birthday in 2002, the former Fed head Ben Bernanke stated that the Great Depression actually had monetary policy causes. Bernanke even apologized on behalf of the central bank: «I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again. »


However, these promises were hot air. Not only did the US central bank with its expansionary monetary policy between 2002 and 2007 – when the M2 money supply rose by 39% from 5.4 to 7.5 trillion. USD was raised – conjuring up the real estate bubble, the bursting of which triggered the 2008 financial crisis.


Since then, she has also steadfastly adhered to her problematic, ultra-expansionary monetary policy of increasing money and manipulating interest rates: from 2008 to 2019, she had even more money M2, from 7.5 to 15.2 trillion. USD expanded 103% in 2019. The Dow Jones gained 128% over the same period (mind you: measured from the beginning of 2008, when the markets were not yet dramatically slumping), although it is not clear which share is due to additional value added and which is due to additional money creation.


The Swiss National Bank even trumped the Fed: it increased its central bank money supply by around 1000% from around CHF 50 billion in 2008 to CHF 584 billion in 2019. The central banks were thus able to present themselves as fire extinguishers in the crises they caused, but at the same time they also reliably poured out the gasoline for an even larger conflagration, which at some point will no longer be under control.

Major monetary policy risks


The latest reactions from central banks suggest that people are unwilling to reverse the threatening trend. The Fed, for example, panickedly cut interest rates to 0% on Sunday evening and announced that it would flood the markets with a huge 700 billion new dollars over the next few days. But the market players seem to have lost confidence, because another dramatic collapse on the stock markets followed immediately.


The risks of such an expansionary monetary policy must not be taken lightly in view of the simultaneously shrinking production due to the interruptions in the global value chains. Under such circumstances, overzealous measures by central banks could quickly turn into hyperinflation – a horror scenario that would be many times worse than an allowed economic downturn. It would be high time for a rethink and an orderly departure from the bubble economy.



Olivier Kessler is Vice Director of the Liberal Institute in Zurich, Switzerland. The Liberal Institute, founded in 1979, pursues the goal of researching liberal ideas. The institute examines the Swiss tradition and culture of individual freedom, peace, openness and political diversity and is committed to the further development of the liberal intellectual tradition.