Earlier this week, head of the European Central Bank (ECB) Mario Draghi announced the start of a quantitative easing program that aims to stave off deflation in the Eurozone. Over the objections of the Germans who want a strong currency that they were promised when they signed off on joining the euro many years ago, Draghi plans to flood the market with up to 1.1 trillion euros over the next 16 months in the hope of stimulating the economy and preventing deflationary spiral. Unfortunately, this action and the risks that it entails, is merely the latest attempt to paper a Europe that is economically stagnating.

That being said, one can appreciate the conundrum that Draghi finds himself in. For years he has tried to exhort the national governments to engage in fundamental economic reforms to make their economies more dynamic, to no avail. The reason that European economies are stagnating is largely due to the fact that they are over-regulated. In any case, the simple fact of the matter is that the current regulatory state in Europe has created a lot of powerful winners in the system, and these are preventing any serious reform efforts that would fundamentally change the trajectory of the European economy from a sclerotic, stagnant one to a dynamic one. A stagnating (or recessionary) economy is one that is going to be susceptible to deflation (see Japan). Draghi is certainly right to be concerned about deflation. Once a country or region enters a deflationary spiral and expectation of deflation become embedded, it can be very hard to reverse. History has shown that prolonged deflation leads to depression, and in extreme cases can lead to political instability, wars, revolutions, etc.

However, what Draghi is doing is trying to use monetary policy to take the place of economic reforms. Since the national governments won’t act, he is doing what he can to try and mitigate the damage. Some might plausibly argue that he has no choice. However, one should not view what he is doing as a long-term positive development for the European economy. By mitigating the pain, he is reducing the impetus for reform. As difficult as it is for some to admit, recent history has shown that most European governments will only engage in reform when they absolutely have no choice. And even then it will be the least amount of reform that they can get away with at that moment. Perhaps in the coming years a global recovery generated by the U.S. or China or some other region will come along and lift the European economy a bit. But until the national governments engage in a full blown economic reform program which they and their populations show no indication of being willing to embrace, Europe will never be a dynamic leader and driver of global economic expansion. Rather it will get pulled along by economic forces generated outside of it, for better or worse. All of the monetary stimulus in the world won’t change that.

Earlier this week, the Swiss rocked the global financial markets by suddenly ending monetary measures designed to prevent the Swiss franc from appreciating beyond a certain amount, relative to the euro. That a central bank which represents a country of 8.1 million people with a GDP ranked 20^th in the world (behind such countries as Turkey, Mexico, and South Korea) could spark global financial unrest around the world and days of commentary comes as a huge surprise, even to those who follow such things. The action and the resulting turmoil provides a lesson to the dynamics involved in central bank intervention in international currency markets along with revealing Switzerland’s unique place in the global financial plumbing.

The first thing to notice is that Switzerland took the action that it did, likely because it feared that  the Swiss National Bank (SNB) was printing too many francs to purchase euros, the value of which were continuing to decline. This means that holding large amounts of euros was a losing proposition over time. Another way to think of it is that the Swiss stopped buying a stock that was losing value and that looked to be losing value for the foreseeable future. A central bank that holds large amounts of foreign currency that loses value can eventually find itself in a position like any other bank that holds too many bad assets, i.e. on the verge of collapse. Given that Switzerland’s position in the global economic financial system is due only to the perception of fiscal probity and stability, allowing even the hint of doubt to be allowed to diminish that perception is not something Switzerland can afford.

The second thing to notice is that Switzerland’s actions caused its own stock market to lose 8% in a single day. The reason for this is that a depreciating franc helps Swiss manufacturers remain competitive with their E.U. competitors. With a rising Swiss franc as the result of this week’s action, Swiss manufacturers (most of whom are export-oriented) will face competitive headwinds resulting in lower economic growth.

The third thing to notice is despite Switzerland’s small size, the fact that it (and the Swiss franc) is seen as a safe haven means that what Switzerland does to its currency has an impact globally. The primary factor driving up the value of the Swiss franc is that instability around the world (Russia) and deliberate devaluation (the E.U.) means that investors are again looking for something stable that will hold its value. As long as this continues, the Swiss franc is likely to continue to remain strong.

So what is the matter with Switzerland? Really nothing. They are a country with a well-deserved reputation for fiscal sanity and stable political system. While this can create some economic headaches from time to time such as an over-valued franc hampering export, and hence economic, growth, it is a lot better than the alternative. Switzerland could do a lot worse.

One of the problems with our public intellectuals that write columns in certain newspapers and appear on certain cable new shows is that they are often merely political hacks masquerading as disinterested, thoughtful people. In many ways, one can often predict what they are going to say before they say it. In the recently released GDP growth numbers (5.0% annual growth rate over the 3^rd quarter) which shows an economy that appears ready to take-off after all of these long years, a certain Nobel Prize-winning economist took to the airwaves and editorial pages to declare that President Obama’s (and by extension his own) policy prescriptions were working. It was not so long ago that this same Nobel Prize-winning economist was declaring that GOP-induced gridlock was preventing Obama’s economic policies from becoming law, was causing the sluggish recovery, and might even push us into a recession. This same individual claimed that the 2009 stimulus would work and then, when it didn’t produce the desired result, stated that it should have been even bigger.

This is not to say that the stimulus should not have been larger. Maybe it should have been. And maybe President Obama’s policies, had they been passed by the GOP House, would have shortened this sluggish period and had the U.S. economy back on track sooner (if indeed it actually is back on track). Or maybe the GOP gridlock, as others are claiming, prevented Obama’s worst policies from becoming law and has allowed the economy to emerge from its slump. What we do know, is that Obama’s desired policies that were not passed by the GOP, as the Nobel Prize-winning economist wanted, were not the policies that drove the recovery. We also know that 4 years of GOP-induced gridlock has not pushed us into a recession in any case. Making a wrong prediction, ignoring it, and declaring that your guy who has been stymied was the cause of the good news is the hallmark of the political hack. That he is a Nobel-Prize-winning economist doesn’t make him any less of one.

As life goes on and years go by, we often learn things that we never knew before. We also learn that what some things we thought that we knew isn’t so. The following is a partial list of things that we learned in 2014.

1.)    The IRS is more corrupt than anybody thought.

Although the IRS has largely stymied the investigation into its targeting political opponents of the current administration, it is becoming clear that this was in fact done, that it was done from the top, and almost certainly with at least some coordination with the White House. Also we learned that it is extremely uncertain that anybody will be held to account for this.

2.)    That several other government agencies are corrupt and incompetent.

From the V.A. scandal with veterans dying waiting for care and the V.A. altering records to the general apparent incompetence of the Secret Service, the idea a government-run operation can be competent and efficient for its intended beneficiaries has taken a serious hit. Like other religious notions that can persist despite overwhelming evidence to the contrary, these revelations are unlikely to dent the faith of the true believers.

3.)    The 19^th century notions of state power still have relevance in the 21^st century.

Vladimir Putin has managed to invade a sovereign country and annex part of it while the world howls in protest.

4.)    That 21^st century notions of state power still have relevance too.

Concerted serious sanctions and a concerted effort to lower the oil price can undercut a petro-state like Putin’s Russia making the adventure in eastern Ukraine costly.

5.)    That there are still enough people who believe in 7^th century version of Islam to turn large swaths of the Middle East into a hell hole.

The Islamic State (IS) has managed to suddenly carve out its own state in the Middle East. It is the most powerful and organized terror group that we have ever seen, and is now effectively a petro-state.

6.)    Politics makes strange bedfellows.

The U.S. and Iran are more or less working together to fight IS in Iraq.

7.)    The world keeps changing.

When historians look back over the last 5 or 6 years, they will likely conclude that this was a time when we finally realized that economic systems that worked for 50 years no longer do and that the power of forces that we never counted on or considered to disrupt the existing order was greater than it had been in a long time.

Happy New Year!!!!