The Coronavirus, a Chance for Central Banks: Long Live the Printing Press!

Zero rates and asset buybacks (Quantitative Easing) began to be criticized during 2019. More and more economists, managers and institutions were pointing out their inefficiency and the risk of bubbles. This was not a massive movement, but the near-unanimity that had prevailed until then had disappeared. Mario Draghi's decision- just before his departure in September 2019-to relaunch the ECB's QE (20 billion euros per month) had led to incomprehension, while the Fed's substantial liquidity injections through the "repo" (a sort of QE without saying so) worried investors (a banking crisis?). We talked about it.

Fortunately the coronavirus has arrived and, as the communicators say: "Never spoil a good crisis". The economy is being hit hard by this pandemic, the risk of recession is looming, and now the central banks are rushing in like a white knight! On March 3, to everyone's surprise, the Fed cut rates by half a point. Certainly upset to have been double crossed in this way, the ECB should act quickly. Moreover, Christine Lagarde stated on March 2 that the epidemic was creating "risks for the economic outlook and the functioning of financial markets", and she said she was "ready to take appropriate and targeted measures, if necessary, and proportionate to the underlying risks". This reassures us.

By the way, what are these interventions for? Admittedly, as soon as the Fed's announcement was made, the equity markets rallied immediately, but fundamentally, how can the printing press compensate for a drop in real activity? It can't do anything about it, of course, it's the virus and the healthcare response that are the determining factors, and this is where we are in the real world, in the very heart itself. The printing press can only offer an extra dose of drugs to the markets, before they fall harder. 

In the current context, central bank intervention is useless, it will even disrupt things by distorting prices. But they are also acting out of fear, fearing that the bubbles (bonds, equities, real estate), which they have helped to inflate with helium, may burst as a result of this unexpected crisis. The coronavirus is a Black Swan that could bring down the house of cards that has been building up for years...

Above all, by acting in this way, by presenting themselves as the only hope, central banks risk throwing us into a crisis that is far more terrible for the economy than a mere temporary recession: hyperinflation. Indeed, as we have shown, the instability of prices requires freewheeling money printing, but also a fall in output-both at the same time- and we are heading there headlong.

Rather than relying on the "magical" powers of central banks, governments would do better to deal effectively with the consequences of the coronavirus, to anchor themselves in reality, to limit the economic impacts, to lower taxes at least temporarily (one can only dream), to manage the health crisis as best as possible in order to reassure the population, otherwise a much more serious crisis is likely to occur.