In a remote north-west corner of Scotland there is an island in the middle of a loch called St Maree. On it are the remains of a chapel and a holy tree, believed to be around 1,300 years old. Legend had it that if you rowed around the island twice, submerged yourself in the water and made an offering to the tree, you would cure yourself from lunacy. Many people made this offering over the years, and the tree was filled with hammered-in coins.
Even in today’s more enlightened world, we see versions of this money tree – be it a political party making unfunded promises, or offering money to cure a problem that money can’t solve.
Regarding the latter, central banks globally have offered money to institutions to cure the problem of low or no inflation. They may not directly give the money away (although you could argue that the ECB’s Long-Term Refinancing Operation does just that), but central banks have been buying bonds that institutions hold, both sovereigns and corporates. Through different channels this money was meant to stimulate lending, boost growth and, importantly, lift inflation.
Years on, global GDP looks fine, but inflation has not taken off, while at the same time we have significant side effects – not least inflated asset prices in bond markets.
The ECB is set to continue its QE programme into 2018; yet inflation has not returned to target and is unlikely to over the bank’s three-year horizon. Which leads me to the popular quote: “the definition of insanity is doing the same thing over and over again expecting a different result”.
On the island of St Maree there were too many offerings to the tree – eventually it died of copper poisoning. Is this what we can expect from the central bank money tree?