The two major central banks of the world demonstrated this week they are fine watching the global economy go over the cliff. Yesterday, it was the Fed. Today, it was the ECB’s turn. Their failure to act in the midst of the ongoing crisis amounts to a passive tightening of global monetary policy. This is because their inaction raises the global demand for safe assets while allowing existing ones to be destroyed. Since these safe assets effectively act as money, the central banks are worsening the excess money demand problem that underlies the global aggregate demand shortfall. This passive tightening has been going since mid-2008 and confirms that we are witnessing what Ryan Avent calls the epic failure of central banking. Future historians will not be kind to these central banks.
P.S. Michael Darda explains why the ECB’s decision today was particularly egregious.
This post originally appeared at Macro and Other Market Musings and is posted with permission.