Last Week Was the Dutch Money Week!

March 21 2016

It may have escaped your attention, but the Dutch have had their ‘Money Week’ last week.

During this annually recurring initiative of the Dutch government, ‘activities are organized in order to teach children on primary schools how to deal with money. A lot of those activities take place in the classroom, where financial professionals will, on request, provide free lessons and workshops. Among others, employees from banks, insurance companies and the municipal credit banks, will teach the children how to deal with money in a fun way’ (excerpt from the associated site).

The Dutch Money Week

The Dutch Money Week is tailored to children on primary schools, and therefore not the ideal starting point to raise attention to the ECB’s policy. However, it is ironic that this year’s Money Week is proceeded by a series of ECB policy decisions that should stop all Dutch citizens in their tracks to think about the subject ‘money.’ After all, these policy decisions aim to reduce the value of our money even further; you could be tempted to call the ECB’s policy the war on money 2.0.

Given that the ECB’s policy is crucial for our wealth, there should actually be a Money Week for all politicians, economists, pension fund executives, analysts, teachers and others. Perhaps I should try to organize one later this year. I have been pointing out, for years now, that current ECB policy is not in Dutch interest, nor beneficial for the euro area as a whole. Time and time again, I have repeated the numerous negative consequences of the ECB’s policy. Not because I can tell the future, but because I know monetary history: there’s plenty of lessons to draw on, lessons to be used today and in the future. Perhaps I should use the publication of my book (about Dutch monetary history and its lessons) as a starting point to start such a Money Week for adults.

Today not only marks the beginning of the Dutch Money Week, but also the second year of the ECB’s struggle to further reduce the value of money: it started to print money on a massive scale a little over a year ago (the so-called QE policy).

Oh, and I almost forgot: what were last week’s policy decisions? And why are they so worrisome?

Policy decision: Reduce the main refinancing rate (at which banks can borrow from the ECB) from 0.05 to 0 percent. Goal: raise inflation.

This is equivalent to the ECB further reducing the value of money.

Policy decision: Lower the deposit rate from -0.3 to 0.4 percent. Goal: incentivize banks to grant more credit.

The reason why Western economies have been in a recession from 2008 onwards, or have seen meager growth at best, is because indebtedness was far too high. The word debt crisis already resembles it quite well. The ECB wants to solve the debt crisis by stimulating banks to load us up with even more debt. Logical reasoning…if you’re living in a parallel universe.

Policy decision: Introduce new loans for banks with, in the worst case, 0 percent interest over a four-year horizon. In the best case, a negative interest rate of -0.4 percent, or, in other words, banks receive money to lend out more credit. Goal: provide an incentive to banks to provide more credit.

In addition to what I wrote earlier, this policy decision gives bank an enormous subsidy (they receive the loans easily, then receive money for taking them out, and also receive interest while lending more credit to families & households). It is a mystery to me how lending more cash to families already burdened by heavy debts is sound policy making, and in the interests of our society.

Policy decision: Buy even more government bonds (80 instead of 60 billion euro per month), and also start buying corporate bonds. Goal: to make lending cheaper for companies, and thereby boost economic growth.

A couple of notes: first, the majority of companies in the euro area is, traditionally speaking, dependent on financing provided by banks. Hopefully the ECB’s policy decision will lead to less dependency on these banks, but miracles are, especially on the short term, not to be expected.

Secondly: I suspect that SMEs, whom demonstrably provide most jobs, will not benefit much. They would benefit however, when banks would stop with the nonsensical liquidity spreads for SMEs. But that won’t happen. And why are those spreads ridiculous? The rationale behind these spreads is that the bank also incurs a cost when funding itself on the capital markets. That is plausible…in normal times. But we live in times when unconventional policies are the norm: a time in which commercial banks can receive UNLIMITED financing from the ECB at a 0 PERCENT INTEREST RATE!

And thirdly: what is crucial for economic growth in the long run, is that the governments who have been living beyond their means for too long, have to improve their ways and reduce their debts. When they are then liberated from their debt burden, they’ll be able to lower taxes and provide their economies a sustainable and stable boost. The current policy set forth by the ECB however rewards more debt, and tells governments (like those of countries like Italy): don’t worry about the interest payments on your debt in the coming years, I am keeping them nice and low. And then to expect that those countries will work on reforms is like you would truly expect that the Belgian football team will voluntarily give its place on the European Championships to the Netherlands because Belgium feels sad for the Dutch.

In my eyes, the ECB’s policy means, for each and every one of us, that we should declare 2016 as the ‘Year of Protecting our Money’ and act appropriately. I don’t know what you think about that, but I am curious to know.

