Still ninety years old, the great Pope Leo XIII spent his sleepless nights studying Latin (the language in which he composed much appreciated verses) or writing encyclicals. He published 86 of them, including Rerum Novarum. A cultured, modern man of acute intelligence, he led an ascetic and simple life. He didn't smoke, ate very little and allowed himself only a few drops of wine. He liked Bordeaux and Mariani. The first was supplied by the local convents, the second, the first time, was sent to him in a sumptuous package by the Corso Angelo Mariani pharmacist, who had created it in 1863. Pope Leo was favorably impressed and commissioned Cardinal Rampolla to send the manufacturer a gold medal and a note stating that the wine had arrived well received. Leo continued to drink it throughout his life, which was (and has remained) the longest in the two-thousand-year history of the popes. Even his successor Pius X (as indeed the Tsar of Russia and the President of the United States) was among the admirers of this portentous wine.
In producing it, Mariani was inspired by the travel notes of the anthropologist and doctor Paolo Mantegazza, who had discovered the great virtues of coca leaves in Peru a few years earlier. In reality, there was little cocaine in his wine but, as we understood many years later, the ethanol in which Mariani macerated the leaves acted as a solvent and considerably enhanced its effect.
Mariani wine was a huge success among the elites. Numerous imitations soon arose, one of which was Coca Cola. After all, cocaine was perfectly respectable at that time and was also administered to children. Freud was enthusiastic about it. Certainly coca-based elixirs and pastilles contributed to the restlessness, but also to the openness to the new, of what the German historian Joachim Radkau has defined, as the title of one of his books, The Age of Nervousness.
The climate around cocaine changed very slowly. The use was first limited, then prohibited and finally demonized. The same fate later befell opium, amphetamines, tobacco, nuclear power, DDT, tanning and red meat. Perhaps one day it will also be the turn of Quantitative easing.
Mariani wine did not cure diseases but, in the words of Emile Zola, it was a wine of youth that procured life and preserved the strength of those who had it, giving it back to those who no longer had it. There was an immediate, symptomatic effect, but there was also a real relapse. Changing the pain threshold did not cure the cause but changed attitudes and the desire to act.
The fathers of Qe (from Milton Friedman to his admirer Bernanke) did not initially distinguish between primary and secondary effects. After all, Mantegazza too had thought that coca directly cured illnesses, especially mental ones. That Qe only relieved depressed animal spirits or directly intervened in the real economy was not considered particularly important. Friedman, on the other hand, thought that there was a constant relationship between the monetary base (the money created by the central bank) and the money supply (the money created by banks when they lend to businesses). Increasing one would also increase the other.
When the first Qe was launched in November 2008, the Fed knew perfectly well that the linear correlation had long since disappeared, but thought that a link, albeit a weakened one and difficult to calculate a priori, remained. If not even that had remained, the Qe would have in any case inflated the value of houses, stock exchanges and bonds, rebalancing the budgets of many families who had a mortgage on the house which was now worth more than the house itself. The resurgence of financial and real assets would in turn have increased the propensity to consume and invest. With the added bonus of a weaker dollar.
The experiment, it must be admitted, was at least partially successful. America is growing at a cruising speed of 3 percent, her stock market is at an all-time high, her bonds are very strong. The price of houses has risen even if construction is recovering slowly, crushed by the banks' unwillingness to grant mortgages. The most feared side effect, inflation, is yet to come.
The causal correlation between Qe and asset appreciation is indisputable and is admitted even by opponents of the Fed. However, the correlation between Qe and the recovery is much more difficult to prove. True, Qe coincided in time with the reacceleration, but the same can be said for other factors. Probably the oil and gas boom, the epic proportions of which are becoming more evident every month (see the exciting hundred pages of the annual report that Ed Morse of Citi, prophet and candid of the American energy superpower, has just published), explains the recovery more than Qe.
In any case, the financial markets matter relatively whether QE has real effects or not, as long as it keeps rates low and provides the necessary liquidity to support prices. And if the economy is doing well, all the better. Richard Koo does not share the enthusiasm of the markets. Beware, he says, Qe only creates temporary bubbles. The monetary base explodes, but the money supply remains immobile. On the one hand, banks don't want to lend money, on the other, companies and households don't want to borrow it. And if one day, suddenly, this desire returns, the Fed would not have time to dry up all the liquidity it has created, not even with the dewatering pumps. Rates would explode and stocks and bonds would implode.
Koo's analyzes are always fascinating, and his argument about the impotence of monetary policy in times of a liquidity trap (and the need for fiscal intervention in its stead) deserves attention. One cannot fail to notice, however, that Koo himself, in line with Robert Fisher's theses, argues that it may take decades for animal spirits wounded by a debt crisis (as in the 2008s and after XNUMX) to recover and come back to life. The explosion in the money supply, therefore, looms a long way off.
Our very practical conclusion is that the distribution and consumption of Mariani del Qe wine, although temporarily suspended in the United States, will continue unaffected globally for some years. The depletion of unused resources in the United States (12-18 months away from full employment) will cause wage inflation to begin (and some market volatility), but inflation will be reabsorbed by a further appreciation of the dollar.
Stock exchanges will remain elevated, but we will only accompany them up to a certain point. We will probably start reducing our exposure to equities as early as January. It will be possible to act calmly, but the goal, unless new factors arise, will be to arrive at the end of 2015 underweight.
Mariani wine remained on the market for forty years. At the beginning of the twentieth century it was prohibited in Italy and then in other countries. Someone began to exaggerate with the doses and the first side effects of continued use began to become evident. Today it is occasionally found offered alongside Cialis and Viagra in e-mail spam.
QE, which is six years old in these days, will accompany the West in the long phase of fiscal crisis linked to the aging of the population. Debt monetization will continue to be the easiest way to avoid deflation and bankruptcy waves. If Marine Le Pen becomes president in 2017, France will leave the euro and the eurozone will dissolve. The first decision that many European countries will take will be to launch massive Qe programs. Someone, sooner or later, will exaggerate and the effects
side effects of prolonged use will gradually become heavier.
The popular tonic for poor economies will then be initially limited, then prohibited by law and then demonized. In any case, Le Pen is currently only the favourite, but her road is still long and arduous.
