Mario Draghi's 'Stimulus' Plan Is the Embodiment of Trite

Mario Draghi's 'Stimulus' Plan Is the Embodiment of Trite
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According to the New York Times, there are presently 315 “unicorns” in Silicon Valley. Unicorns are companies with valuations of $1 billion or more. As of 2015, there were 131.

For the central-bank obsessed prone to tying the impossibility that is “easy money” to every story of economic progress, the surge of investor interest in technology companies in concert with booming growth in northern California is surely a sign of feverish stimulation from the Federal Reserve. Except that it couldn’t be.

If one accepts the laughable notion that investors are routinely tricked by central bank machinations on the way to nosebleed valuations, this notion would reveal itself indiscriminately. If boom times are more central bank than individual genius, then it would have to be true that “unicorns” would be sprouting up all over the country, including in downtrodden locales like Memphis. If the money’s “dumb,” then it wouldn’t be migrating to where the analysis of and interest in start-ups is pretty smart. Valley companies are among the most scrutinized in the world, so it’s illogical to presume that valuation-boosting irrationality from the Fed would find its way to where the most painstaking evaluations of businesses are taking place. Figure that there are billions on the line as evidenced by a surging unicorn count.

Which brings us to European Central Bank (ECB) president Mario Draghi’s announcement last week that he would maintain what David Lynch of the Washington Post described as “rock bottom” interest rates through the end of the year. Supposedly the “cheap” credit will stimulate lending and subsequent economic activity, if conventional theorists are believed. Don't be fooled.

There's quite simply no such thing as "rock bottom interest rates" or "easy credit," despite what the economic fabulists in our midst tell us. To see why, it's worth remembering that no one borrows euros, rather they borrow what euros can be exchanged for. They’re borrowing trucks, tractors, buildings, computers, and most of all, labor. The ECB can’t decree resources cheap any more than Emmanuel Macron can decree apartments on Paris’s West Bank inexpensive. Market realities always and everywhere rear their wise head. Short of the ECB expropriating resources from the world’s producers by force, or the ECB revealing a previously unknown control over gargantuan warehouses pregnant with economic goods across the continent, Draghi cannot maintain “rock bottom” rates of interest.

More realistically, credit will be expensive. The latter is particularly true if the European continent is economically struggling, as Draghi asserts. Those with access to resources generally don’t go out of their way to cheaply lend into sluggishness. There’s no need. Where credit is scarce is also where it can be loaned at higher than normal rates. Much as central bankers and the monetary mystics who follow them may think otherwise, neither the ECB nor the Fed nor the BoJ can decree credit cheap.

Wait a second some will say, the ECB intends to “funnel more credit to banks” only if they’ll lend the money right away within Europe at low rates. There, if the mystics are to be believed, is the “easy credit” on the way to stimulation. Except that such a view would be naïve. For one, the ECB once again can’t create credit. At best it can redirect where some is funneled through. In this case the ECB will project its well overstated influence through banks that, as a rule, must be careful in how they lend. Translated, they need to be paid back.

The problem there is that prosaic lending will not power a boom. More realistically, the credit “created” by the ECB will just make it more likely that businesses and industries that already have access to credit, will still have access to it.

But the bigger reason Draghi’s plan won’t work can be explained by the hundreds of unicorns out in Silicon Valley, and the likelihood that there are zero in Memphis. Since there’s so little economic dynamism in one of the U.S.’s poorest cities, any attempts by the Fed or any bank to stimulate economic activity there via easy credit would fail rather quickly. Think about it. Imagine the Fed aggressively buying up bonds from Memphis banks in order to liquefy them. Does anyone seriously think there would be a subsequent economic surge in Grind City?

The answer to the above should be no. If we ignore that banks aren’t generally the source of growth capital as is, the inconvenient truth for central bankers convinced they can alter reality is that banks need to be paid back. Absent performing loans, they quickly become insolvent. That’s why any Fed “stimulus” in persistently sluggish Memphis would be corrected almost instantaneously by market forces. Translated, increased credit directed toward Memphis would vanish as quickly as it arrived.

Conversely, any central bank attempts to shrink the amount of credit in Silicon Valley would similarly fail within seconds. Precisely because there’s so much human capital (the ultimate resource, and something central banks most certainly can't increase, or more laughably "multiply") in northern California, any Fed efforts to reduce resource access there would be made up by global sources of credit within minutes.

Bringing this all back to Europe, the ECB can’t brighten the economic landscape there any more than the Fed could do the same in Memphis. It’s a reminder that central banks can’t instigate through rate cuts as much as they’re passive rate followers. The latter is a blinding glimpse of the obvious. Credit availability is a function of resources created in the real economy, and that never lay idle. As for cost of credit, it’s low where odds of payback are high, abundant (but still costly) where talent is, and then it’s costly and/or non-existent where the means to repay are low and economic talent scarce.

Unless the ECB can make human capital abundant on the Continent in the way that it is in northern California, good luck with the ECB’s faux stimulus plan. Markets are rather wise, and they sold off on further evidence that Mario Draghi is more than clueless to the previous truth.

Central banks quite simply cannot alter reality. By extension, central banks can't "create" liquidity as much as they can confirm what market forces already have. Let Draghi’s trite, and soon-to-fail plan be a lesson to the monetary religionists stateside: market forces will correct what makes no sense.

Applied to the U.S., the rising economy and stock markets of modern times haven’t been a function of “easy credit” given the happy truth that markets for equities and credit are never as dense as central bankers, or the holy rollers who breathlessly follow their every uncoordinated move. The U.S. booms because it’s brimming with talent, including European talent. Until Draghi and other central bankers realize this, they’ll continue to try to force positive outcomes, only to be smacked back into reality by market forces exponentially more powerful than they are. 

John Tamny is a speechwriter and writer of opinion pieces for clients, he's editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( His new book is The End of Work, about the exciting explosion of remunerative jobs that don't feel at all like work.  He's also the author of Who Needs the Fed? and Popular Economics. He can be reached at  

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