Has the Draghedie decade begun?

What will the new year bring economically? Outlooks 2020 has been raining for some time now. What I find at least as interesting, however, is looking ahead to the coming years. Especially now that we are not only starting a new year, but also a new decade.

We can rightly call the decade that we have left behind an exceptional decade. For example, because the American economy was protected from a recession for the first time since 1850. Add to this the facts that: a. inflation was very low during that period, stock prices broke one record after another, b. interest rates have fallen to their lowest point ever and c. all monetary instruments that were very unconventional at the beginning of the decade have now become standard instruments. Exceptional is indeed an obvious characterization.

no free lunch
My only fear is that the old economic adage 'there is no free lunch' will continue to hold true. And that the bill for the exceptional, recession-free decade will have to be paid sometime in this decade. The exceptional performance in the ten years behind us was mainly made possible by the whatever-it-takes policy of central banks worldwide.

Under the leadership of Mario Draghi, former president of the European Central Bank (ECB) who will forever be known for his 'whatever-it-takes' statement, the ECB has cut interest rates to 0%, among other things. And then kept the interest on it, promising to keep it that way for a long time to come. This policy not only has bright sides, but also dark sides that only become visible after a while.

Wealth inequality is growing
The financial sector, rather important for many people (insurance, pensions), has been weakened by it. Many people start saving more to compensate for the loss through the 0% savings interest. Wealth inequality is increasing, leading to dissatisfaction and fueling populism. In short, it means that the middle class is weakening, the economy is less able to grow and therefore becomes more vulnerable to setbacks. This worries me, because it is not a question of 'if' but 'when' the economy will enter a slump.

With lower growth than before and increased fragility, there is a good chance that this economic downturn will lead to a recession in the medium term. Especially because the traditional defense mechanisms are broken. Governments can't offer much defense as most budget deficits are on the high side and central banks have long lost their gun.

From hero to zero
However the medium term is defined, it is certain that a recession will fall within the current decade. Many who now consider Draghi a superhero may see him fall hard off his pedestal this decade. So from hero to zero, coincidentally also the level to which Draghi brought the interest rate to for a long time.

Although a period of economic downturn or recession is nothing new under the sun, the next edition will be unique. It is the first period of economic downturn or recession in which our policymakers really have little to offer. And the fact that we have no defense is in large part because of Mario Draghi and his policies.

Bare-handed economic downturn
As a result, the decade we have started could well be a very exciting one. On the one hand, because we don't know what the central banks are going to pull out of their monetary hats (whatever it becomes, it will almost by definition be super unconventional) and on the other hand, because we don't know how things will turn out. As mentioned, it will be the first time ever that we will enter a slump with bare hands.

I seriously consider that this will be the decade in which the long-term ill effects of the ECB's policies will become apparent. At his last press conference in late October, Draghi said the main thing for a central banker is to try not to be boring. In early January 2000, Mervyn King (not the darts player, but the then deputy governor of the British central bank) gave a speech. In it, he said that a successful central bank should be boring, like a referee who does not stand out at a game.

Monetary adrenaline has a price
Because, as mentioned, Draghi is forever known for his 'whatever-it-takes' statement, the song of the same name by the band Imagine Dragons seems to be his anthem. 'Whatever it takes, 'Cause I love the adrenaline in my veins, I do whatever it takes, 'Cause I love how it feels when I break the chains', is part of the song.

In my view, King's description of a good central banker fits better. Draghi's need for monetary adrenaline and to break chains could - I fear - cost society dearly in the long run. No, when I point out an anthem for Draghi, I rather think of the song Tragedy by Bee Gees: 'When the feeling's gone and you can't go on, It's tragedy, When you lose control and you got no soul, It's tragedy.'

Emperor without clothes
Anyway, I will not be surprised if in this decade the sweet feeling of 0% interest and quantitative easing disappears, the realization dawns that the central banks cannot continue with their current policy with impunity, that the effectiveness of even more controversial measures is very small (also known as the emperor-without-clothes phenomenon) and that control is lost.

It is discovered that the central bankers have sold the soul of the economy to the monetary devil for a short-term advantage. The price in the long run is tragedy, or rather Draghedie. Because that tragedy is largely caused and cannot be combated by the policies of Mario Draghi.

Edin Mujagic

Edin Mujagic is a macro-economist and chief economist at OHV Asset Management. He focuses on global central banks, and in his blogs he mainly writes about the ECB and Fed. He has also written several books.

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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