‘That does not make sense to me, Steven’.
I had called my 86-year old grandmother upon landing from a recent European trip. ‘They tell me’, she said, ‘that interest rates in Switzerland are zero’. Actually, I replied, they are negative.
Dearest Oma, you are not losing your marbles. I don’t think it makes sense to many people. But it is the world we live in. And with the European Central Bank about to announce a dramatic increase in its quantitative easing – purchasing €50bn of government debt each month for the next one to two years – citizens are going to be paying for the privilege of depositing money in a few more countries yet.
It might help stave off inflation, but it’s not going to fix Europe’s problems.
Money is like the fuel in a car. It’s an important input, and without it you won’t be going anywhere, but it’s not what makes the car go fast or slow.
Monetary policy can be very useful. It allows you to supply more gas when the car is going uphill and less when it’s rolling down the other side. It also allows you to stop air pockets forming in the fuel lines.
Recessions can become self perpetuating when less spending leads to less jobs which leads to even less spending. Indeed, most economists now attribute the scale of the Great Depression to a failure of monetary policy.
It can help avoid another great depression. But monetary policy, like money, doesn’t make for faster economic growth. If you want a car to go faster, you need a bigger engine, a lighter chassis or a more aerodynamic design. If you want an economy to grow, you need an educated workforce, you need to make it easy to hire and fire people and easy to start and close a business.
I don’t see much stomach from voters for the structural changes required to allow Europe to grow. We can cross our fingers for QE, but I won’t be holding my breath. And if someone can explain negative interest rates to my Oma, please let me know.
This article originally appeared on the Forager Funds' blog.