In response to the economic paralysis brought about by the coronavirus, the Chinese central bank has pumped $243 billion into financial markets. On Monday, February 3, 2020, China’s equity market shed $393 billion of its value.
Most experts are of the view that in order to counter the damage that the coronavirus has inflicted, loose monetary policy is of utmost importance to stabilize the economy. It is believed that the massive monetary pumping will lift overall demand in the economy and in turn will likely move the economy out of the stagnation hole.
According to this way of thinking, consumer confidence, which has weakened as a result of the coronavirus, could be lifted by massive monetary pumping.
Now, even if consumers were to become more confident about economic prospects, how is all this related to the damage that the virus continues to inflict? Would the increase in consumer confidence due to the monetary pumping cause individuals to go back to work?
Unless the causes of the virus are ascertained or unless some vaccine is produced to protect individuals against the virus, they are likely to continue to pursue a life of isolation. This means that most people are not going to risk their lives and start using the newly pumped money to boost their spending.
It seems that whenever a crisis emerges, central banks are of the view that first of all they must push plenty of money in to “cushion” the side effects of the crisis. The central bankers are following the idea that if in doubt “grease” the problem with a lot of money.
It did not occur to all the advocates of the aggressive loose monetary policy that this is going to transform a given economic crisis into a much larger one.
Most advocates would respond that it is the central bank’s duty to defend individuals against various bad side effects. The only way they can defend individuals is by not adding more damage.
If loose monetary policy could counter the bad side effects of the coronavirus, we could agree that money pumping is an effective remedy to eradicate side effects of viruses. In such a case, central bankers should be nominated for the Nobel Prize in medicine.
But most experts still don’t get it—money is just the medium of exchange. It produces nothing and it can only provide the services of a medium of exchange. If we begin to consider money as something magical that can fix everything, including eradicating the economic side effects of the coronavirus, it opens the door to nasty economic surprises.
