Economic mobilization based on nationalism is dangerous

OLYMPUS DIGITAL CAMERAMarek Dabrowski world-famous economist, former Polish financial minister accuses the decision makers of the large central banks of irresponsibility and narrow-mindedness.
The interviewee, who is the ex-president of the most prestigious Polish economic workshop, the CASE (Center for Social and Economic Research) says to that the American, British, Japanese, and now the European central banks’ policy of excessive money supply became self-serving, distortive, and price-manipulative, increasingly  damaging the global economy.

Professor Dabrowski has no doubt that this will result in huge inflation and chaos on the markets. Also, due to the big easing, the interbank markets have extremely weakened.
According to him, the demand-stimulating measures of the central banks of smaller and more fragile economies – like in Hungary – are reasonable, even if there are no substantive reforms on the demand side. Therefore, the devaluation of the forint might backfire.
The Polish expert believes that it would be a mistake if Western Europe and Japan continued to stimulate demand because demand expansion has no objective potential there.

Zentai Péter: In your highly controversial article (, you say that the massive easing measures (quantitative easing) of central banks of the United States, Great Britain, Japan, and some smaller countries following them are dangerous. As seems quite certain, the European Central bank will launch a program like that soon. Do you think the ECB is playing with fire?

Marek Dabrowski: In 2009 and 2010, it was quite right to flood the economies with money. I am still not against the measures that central banks of smaller countries – such as Hungary – take in order to stimulate the economy.
As for Japan, Great Britain, the United States, and the Eurozone, it became clear that their central banks should have stopped the quantitative easing a long time ago. Now, they are only manipulating the markets for their own sake and causing considerable harm to the global economy. The big central banks are trapped in their then well-reasoned and right decisions from 5-6 years ago.

What do you mean when you are talking about damages?

They export liquidity to some regions of the world where there is no need for it. As the macro data proves, the economies they target improve the least. Latin America, Asia, and other emerging markets are flooded by excessive liquidity from the West and from Japan, which – due to speculation mechanisms – manipulates the exchange rate of the local currencies. In the end, the emerging markets become the victims of the easing programs of the American, European, and Japanese central banks.

Furthermore, the expansion of the over-supply of liquidity leads to inflation. Although I think that there is no risk of inflation right now, there is going to be a downside to this policy is from of a dramatic increase in the inflation rates in one, two, or three years.
Sooner or later, the balance sheets of the central banks and commercial banks will show such a huge deficit which, in itself, could create a banking crisis.

As for the micro risks and the damages, the transmission role of commercial banks has, in effect, diminished due the quantitative easing. The central banks became the financial intermediaries to the real economy. The banks that should perform a bridging function are still not lending, they do not dare to lend. The easy money is either stored in the central banks or exported to financial markets. In the developed world, the interbank markets work only ostensibly.

However, in America, they start to end this…

There is no doubt about it but they are doing it extremely late and slowly. Later, it will become clear how much damage the manipulate asset prices, such as stock prices, have done. Nevertheless, there is a growing bubble in both the developed and emerging countries.

Robert Shiller (latest Nobel Prize winner) may be right. According to him, the most important thing is the narrative – that is how the central banks and governments are communicating their monetary and fiscal actions. If they make the policy credible for the target group, it becomes realistic. Robert Shiller based this argument on Japan’s example.

I do not agree with Professor Shiller, even if some of his economic-psychological theses have proved to be correct. I think that he is strongly exaggerating the importance of the animal spirit of the market players in his recent article ( He based his assumptions on Japan, where the truth about the economic and financial policies is starting to expose itself. This “magic” might have paid off in the past months (maybe one year) but in the past weeks it has become clear that there is a huge balloon that is about to pop because if demand is stabilized – in physical, qualitative terms –, it is impossible to increase it. The extra capital injections are unnecessary, if the society is aging and the size of the population is decreasing. However, on the supply size, reforms need to be made: for instance, opening the door to foreign labor and liberalizing the domestic market – especially, the labor market.

Robert Shiller’s observation is that nationalism is an essential element of the Japanese economic policy. The foreign workforce would not fit into the system. By stirring up nationalist feeling, they unify the economic policy and make it a patriotic duty to acquire more Japanese goods and services.

This kind of economic mobilization would certainly last but a very brief time. Nationalist economic policies work for a while but increasingly harm other regions, slow down and hamper global economic growth.  In the end, everybody is worse off. In the 1930s, larger and smaller countries tried to overcome the crises by nationalism and protectionism. Germany, Japan, and in a way, the United States have achieved considerable results. But all the nationalisms and protectionisms canceled out each other and led to the Second World War.

Today, the devaluation of the currencies is integral part of the nationalist economic and financial policies. This is what the central banks and the governments of Japan and Hungary – copying Japan – are doing.

Once again, the devaluation is a short-term tool which, sooner or later, will backfire on the fragile and vulnerable economies. The devaluation that aims to stimulate the economy is at the expense of others, of the environment. The forced depreciation “kills” the open economy since it manipulates the convertible financial markets. Thus, it weakens the nature of the economy and causes damage in the long term.

Nevertheless, I am not talking about the small economies, such as Hungary or my home country. I recognize the importance of central bank interventions to stimulate demand in such cases.

In our region, there are huge potentials on the supply side. In order to realize this, however, we need something we abandoned at the end of the 1990s – structural reforms. Without them, the way-too-early established institutions typical for welfare states failed. We immaturely tried to establish Western European-like welfare states.

At the same time, the welfare-state model is facing a crisis in Western Europe because they also abandoned the structural reforms that would have ensured competitiveness and economic efficiency. They should have liberalized the labor market much boldlier and earlier.