Policymakers in most industrialized economies have been on a spending spree during the last few decades. It seems as if governments and central banks want to smooth the business cycle entirely in order to avoid recessions. Despite benevolent intentions, their track record speaks against their actions. Business cycles are a typical characteristic of capitalist economies. The pattern reoccurred reliably throughout centuries. It resulted in a positive GDP growth drift that made every generation better off than the previous one. On the other hand, government and central bank intervention are centrally planned policies. Centrally planned economies have a mediocre track record because the central planner needs to be benevolent and competent in implementing effective policies. However, neither fiscal nor monetary policy is sustainable long term. Both trend towards an excessive spending path.

Source: Christoph Leisinger, Treasury Department

Ineffective Monetary Policy

Crises come and go and countercyclical policy is an adequate tool. However, Western policymakers do not act countercyclically and decrease spending during economic expansions. Debt levels and central bank balance sheets are inflated. The chart below shows the aggregate balance sheets of western central banks. Their combined balance sheet expanded almost linearly throughout the longest cyclical expansion in US history. Countercyclical policy should have led to contracting balance sheets instead. Eventually, the next crisis arrived in early 2020 and policymakers try to spend their way out of trouble once again.

Source: Bloomberg, Christophe Barraud

The West is on its way to copy Japanese monetary policy even though it proved ineffective for the past decades. It left Japan with a massive debt burden and inflated central bank balance sheet despite low GDP growth. Hence, there is overwhelming evidence against the effectiveness of the policy that our central banks implement. Investors have the right intuition and shift some of their savings into gold. They witnessed that central banks have not been able to trigger a modest amount of inflation to relieve the debt burden in most industrialized economies. Therefore, it is reasonable to distrust central banks to control inflation once it resurfaces because their policy tools of choice proved ineffective already. Meanwhile, artificially suppressed yields lead to the misallocation of capital. A situation that probably affects growth and innovation negatively in the long term.