The Definition of Insanity

Asad Dossani
Albert Einstein is famous for this quote: "Insanity is doing the same thing over and over again, but expecting different results." This came to mind last week, after the Bank of Japan's meeting. In case you missed last week's commentary:

The Bank of Japan (BOJ) decided on a modest dose of monetary stimulus at the close of its two-day meeting on Friday. Further, the central bank said that it would buy 6 trillion yen (US$58 billion) worth of exchange traded stock funds annually. This was against 3.3 trillion yen previously.

One must note that the BOJ at present is printing 80 trillion yen (US$750 billion) a year to stimulate inflation after decades of deflation and stagnant growth. Despite all these measures, the inflationary expectations appear to be weakening. An entry in Vivek Kaul's Diary explains how Japan became a giant laboratory experiment for novel monetary policies.

Why did monetary stimulus fail? Maybe because it wasn't large enough. Perhaps if we do even more stimulus, that will help. Or maybe it didn't fail, because things would be much worse otherwise.

The standard responses to the failure of monetary stimulus meet Einstein's definition of insanity. Keep doing the same thing even though it doesn't work. Find ways to justify what you did, so that you can keep doing more.

Global interest rates are at zero. Asset purchases are at full steam. Its clear we have reached the limits of monetary policy. Money is so cheap, that making it even cheaper has no impact. Somehow, we've come to expect that lowering interest rates, or buying bonds, is going to turn the economy around.

But in reality, the economy is more complex than that. Economic performance depends on so many other factors. These include fiscal policy, regulation, corruption, demographics, technological change, to name a few.

Interest rates are important. But they're a small piece of the puzzle. And once interest rates go to zero, they become less relevant.

This begs the important question. Why do central banks carry on with stimulus? Why continue doing something that stopped working a long time ago?

Policy makers are human. And human beings have a natural tendency to try and fix things. There's a desire to be doing something rather than doing nothing. Even if that something is useless. Or even if doing nothing is the right course of action.

For this reason, central banks will continue to meet Einstein's definition of insanity. And at some point when the economy recovers, they'll claim credit. Even if it happened for completely unrelated reasons.

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3 Responses to "The Definition of Insanity"
06 Aug, 2016
very good , informative and valuable article.Like 
Anil Nath
05 Aug, 2016
Everything in this world is governed by a law and laws are universal in nature......human beings, including central bankers, are part of nature, hence, are governed by its laws. Loose monetary policies are in harmony & compliance with the law of following the path of least resistance......every flow, from one point to another, follows this law e.g. electricity, also central bankers try to get out of a troubled situation by following this law, they choose a path whereby least work has to be done!!Like 
05 Aug, 2016
Hi Asad, All Major economies in the world are running a high Debt to GDP ratio. There is practically no scope for Fiscal stimulus. At the same time these countries are not willing to adopt any reforms. Money printing is the only game in the town. QE4 is coming soon in US. Helicopter money is coming in Japan. It looks like easy money will be flooded till 2020 at least.Like 
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