Who loves miserly central banks?

Nowadays, some prominent politicians, economists and opinion writers are praising the European Central Bank and the Federal Reserve Bank for their generous acts to create liquidity. Naturally, there are also some out-of-tune voices trying to point out the risk of inflation and enormous future deficits. Who cares? The European banks are very happy to have plentiful, cheap money. The new head of the ECB suggested that, if it were necessary, he might do it again on even a larger scale.

Some people say that Mr. Mario Draghi could do that in just two months when all of Europe and the International Monetary Fund tried for one year to put together the famous rescue fund which was much smaller in size. In the United States as well, most people think that the main reason for the recent improvements in production and employment has again been due to the generosity of the FED.

Some writers are defending a very interesting idea that if there is no increase in real wages, there will be no inflation risk and that this is the case nowadays. However, in every macroeconomic textbook, it is explained that the main reason for inflation is inflated total demand. And a rapid increase in money in circulation is also the main reason for inflated total demand. The extra money created by the central banks might not go into the pockets of the workers, so where does it go?

For some people, the new head of the European Central Bank is not only the savior of Europe but also of the rest of the world. They say that he prevented a catastrophic bank run like the kind that created havoc during the 1929 crisis. However, when the FED began to inject extra money into the economy to prevent a recession, pretty much the same people even accused the governor of the bank of treason. Now Mr. Ben Bernanke, the governor of the Federal Reserve Bank, is perceived as a brave man who prevented a financial crash similar to what happened in 1929.

Are the acts of these very important central banks enough to prevent recession on both continents? In the United States, the loose monetary policy seems to have been successful in doing that. But in Europe, there are different economic problems. Europe might already be in recession. The recent act of the ECB seems to have solved the short-term problems of the European banking system but not the long-term ones. If the troubled economies in Europe cannot establish reasonable macroeconomic balances in a reasonable amount of time, there is a risk of wholesale bankruptcy. And to establish reasonable macroeconomic balances, some reforms are necessary.

The real danger of easy money is the addiction it creates. It means that if necessary reforms cannot be realized for political reasons in individual countries and – accordingly – if Europe cannot display some positive signs indicating the end of the recession, there will surely be strong political pressure for another dose of easy money. If the ECB refuses to grant another dose, it will unjustly become a scapegoat. Then everybody will forget their love for Mr. Draghi and will begin to hate him.

Another critical point is whether the banks, businesses and, most importantly, the governments in troubled European countries can take advantage of the easy and cheap money to backpedal on necessary reforms. There are some signs which support these concerns. It is a widespread rumor that banks in Spain have already become reluctant to apply the promised reforms and that the government has become relaxed fiscal targets. There is also talk that the French government, which is facing an election, might lower the retirement age from 62 to 60, defying the suggested fiscal stability measures.

There are of course other concerns such as the technical difficulties of using easy money offered by the ECB to fund businesses and households which generally have maturities beyond three years. However, the most important concern must be the probability of a new surge in inflation created by easy money before any sign that indicates an exodus from recession. It means more probable stagflation, the last bout of which continued to damage the world economy for almost a quarter of a century.