If crazyness is doing the same thing over and over and expecting different results, then the European Central Bank (ECB) is completely nuts. Its president, Mario Draghi, announced that the interest rate would be lowered to 0.05 percent, that the ECB would buy more mortgages and securities and that it would charge banks even more for “excess” reserves. That way, he hopes to stimulate EU growth, which hasn’t really recovered from the 2007 recession.

To quote a famous add in Quebec: if it existed, we’d have it. In this case here, the politic of cheap credit/easy money has been tried time and time again and has always failed ultimately.

And the phenomenon is not new. Richard Cantillon, an Irish-French economist that died in 1734, was one of the first ones to see that printing money does not create wealth. As he puts it:

Une abondance d’argent fictif & imaginaire cause les mêmes désavantages, qu’une augmentation d’argent réel en circulation, pour y hausser le prix de la terre & du travail, soit pour encherir les ouvrages & Manufactures au hasard de les perdre dans la suite : mais cette abondance furtive s’évanouit à la premiere bouffée de discrédit, & précipite le désordre. (In summary: an abundance of fictious money creates the same disadvantages as an increase of real money: it increases the price of land and labour or of the work. But this temporary abundance vanishes at the first sign of doubt, accelerating the pace towards chaos. The English version of the book is available here)

This has been observed numerous times on the planet. Just watch the progression of M2 in the US in the 1960s (before the stagflation era), in the mid 90s (the dotcom bubble) and during W Bush’s presidency (the housing bubble). Even under Obama, the monetary supply kept increasing at an accelerated rate – the “quantitative easing” -, and yet this was the slowest recovery since World War II. Japan has had similar problems; despite an increase of M3 by over 17 percent, the economy hasn’t really recovered from its numerous troughs of this century.

It’s not hard to see why. You see, consumption is done either today or in the future (also known as saving). When interest rates are decided by the market, it reflects what people prefer. If they want to consume now, interest rates will be rising since more people will demand loans. The opposite will happen when more people will want to save as there is an abundance of savings.

However, when governments artificially lower interest rates, they change people’s incentives. For example: imagine you’re a business man and you want to expand your factory. With a 5-percent interest rate, it’s not worth it because it’s too expensive. But if the rate magically decreases to 2 percent, then we’re in business!

There’s a slight problem, however: that new interest rate is not a reflection of people’s preferences. Therefore, the loan granted to the businessman is not entireley backed up by savings. It becomes obvious when many more businessmen follow suit and borrow money at the artificially low interest rate.

When that happens, governments are left with two choices: Let the bubble inflate so much that the economy collapses or increase interest rates and create a recession. The latter is vital for the economy for it needs to purge the bad investments made during the euphoric low-interest period. When governments “do nothing”, as Harding did in 1920, then the economy recovers quickly. But when they intervene, as Hoover and FDR did, then it perpetuates itself for a long, long, long time…

In short, if “Super Mario” is serious about restoring the EU economy, then he must do what works: Nothing. Or rather: let people decide for themselves when they want to consume so they don’t burn out all their savings and simply thwart future economic growth.