Every central banker and monetary authority understands economics. Each recognizes that debt-centric spending, interest rate repression and eye-popping additions to total government obligations will not sidestep inevitable defaults and/or worthless currencies in the future. So why has every influential central bank on the world stage – Federal Reserve, Bank of Japan, People’s Bank of China, Bank of England, European Central Bank – pursued policies that merely delay the moment of reckoning? Why does kicking the “catastrophe can” down the path always get the nod over fundamental changes in behavior?
The primary answer is that central bankers are politicians. They know that slower economic growth, stagnant wages and income inequality directly result from can-kicking endeavors. Yet they are also aware that pushing problems out into the future means they will not be in power to be held responsible and that even the illusion of prosperity feels better to the public than having those people address inconvenient realities right now.
Who likes the notion of facing the music today to ensure longer-term prosperity? It is so much easier to live wonderfully in the moment, regardless of where the dollars, euros or drachmas come from, while letting others worry about out-of-control borrowing. And when it comes time to deal with the byproducts of “kicking the debt can down the pathway” (e.g., stagnant wages, income inequality, sub-par economic growth, etc.), politicians promise to “fix” the problems with force; leaders push higher wage laws and higher taxes to redistribute wealth. Unfortunately, concepts of fairness notwithstanding, the cost of goods rise alongside the higher wages, meaning that nobody is keeping more of that money. Similarly, redistributing the wealth pie does not increase the size of the pie itself.
Perhaps the idea that Greece will receive yet another euro bailout is one that temporarily calms anxious equity investors. Or perhaps the contentious battle that has been playing out over the last few weeks has scratched the cloak of central bank invincibility. Tracking Global X FTSE Portugal (PGAL) and iShares MSCI Spain (EWP) may provide the best clues going forward. For example, the anticipated jump off the July lows for PGAL reflects initial excitement over the euro-group’s tentative agreement with Greece. On the other hand, the slope of the 50-day moving average and the slope of the 200-day moving average are negative, suggesting that Portugal still remains handcuffed by its downtrend.