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The Lords of Finance are skidding out of control
Financial markets have become dangerously dependent on the cheap monetary steriods of central bankers – creating yet more debt
Has the US Federal Reserve made a terrible policy mistake in raising rates? Photo: Jay Mallin/Bloomberg News
By Jeremy Warner
7:00AM GMT 29 Jan 2016
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236 Comments
'When the facts change, I change my mind. What do you do, Sir?” So reputedly said the British economist John Maynard Keynes. Economists are always changing their minds, but few practitioners of the “dismal science” do it quite as regularly as central bankers.
I’ve lost count of the number of times Mark Carney, Governor of the Bank of England, has signalled an interest rate rise, only to row back a few months later in the face of a softening economy, turmoil in the markets, or a plunging inflation rate.
On the other side of the pond, his opposite number at the US Federal Reserve, Janet Yellen, last month succeeded in pushing through the first US rate rise in nearly 10 years, but already she is being widely accused of making a grave policy error.
With panic in the markets, and the US economy showing renewed signs of weakness, there have been near hysterical calls for the Fed to reverse the decision. Rightly, it has so far chosen to ignore them. To change tack so quickly would indeed be a damning admission of failure.
If nothing else, the debate around this quite marginal rise in US rates demonstrates just how reliant on central bank stimulus, and sensitive to any changes in it, the world economy has become.
"Every time the markets sneeze, central banks are expected to step in with the resuscitator. If economies are ever to get back to normality, it is vital they stop this nonsense"
It beggars belief that a mere quarter point increase in the Fed Funds rate is going to make the difference between a recovering economy and one that plunges back into recession. Yet every time the markets sneeze, central banks are expected to step in with the resuscitator.
If economies are ever to get back to normality, it is vital they stop this nonsense.
In the early months of the crisis, the central bank response of cranking up the printing press seemed more than justified. Timely action by the Federal Reserve and the Bank of England prevented the crisis from turning into something very much worse.
But it is debatable how much good the monetary steroids have done since; arguably, they may now be doing quite a lot of harm. In advanced economies, at least, there is not much sign of the revival in investment spending the recovery needs to become self-sustaining. The overwhelming mood of international business leaders at the World Economic Forum in Davos last week remained one of extreme caution.
In the face of so many uncertainties, sitting on your hands and doing nothing has, for many chief executives, become the order of the day. Highly accommodative monetary policy doesn’t seem to be making a blind bit of difference to this hiatus in investment. “Animal spirits”, as Keynes described them, have failed to rekindle, despite the positive effect easy money undoubtedly has had on consumption. Unfortunately, growth cannot for ever be sustained on a diet of debt-fuelled household and government spending. It needs ultimately to be backed by rising business investment and productivity.
Speculative investment in stocks, bonds and property – the other main beneficiary of all that central bank support – seems even less likely to provide the foundations for sustainable growth. To the contrary, it serves only to make the world more vulnerable to bubbles and financial crisis.
If loose money has ceased to help, what are the alternatives? Most governments are too fiscally constrained to provide anything more in the way of demand stimulus. By chance, however, there is one unexpected bonus in the world economy right now – the low oil price.
For big consumer nations, lower oil prices act like a tax cut and therefore provide the equivalent of a fiscal boost. Just as very high oil prices mark the last hurrah of the boom, and therefore tend to push advanced economies into recession, low prices have in the past invariably had the reverse effect in front-running global recovery.
"Across the world as a whole, debt has continued to grow, and now stands at hitherto undreamt of levels relative to output"
Yet the temptation is to see the low oil price as a deflationary signal, a sign of stagnant demand, rather than the geopolitically complex series of positive supply-side shocks which provide the better explanation. In any case, its depressing effect on inflation has given the world’s leading central banks yet another excuse for keeping monetary policy ultra-accommodative.
The financial overlords of central banking may understand economics, money, and markets better than any, but they don’t have the answers and seem just as frequently to get it wrong as right. When a car skids, the best response is usually to turn the wheel into the skid rather than against it.
This approach has broadly instructed the central bank response – to treat a crisis caused by too much debt with yet more of it. Yet some skids are too extreme to counter. Across the world as a whole, debt has continued to grow, and now stands at hitherto undreamt of levels relative to output. Excessively easy money may have succeeded in temporarily mitigating the crisis, but its underlying causes remain very much with us. Thanks to the “Lords of Finance”, these disequilibria have got worse, not better.
Financial markets have become dangerously dependent on the cheap monetary steriods of central bankers – creating yet more debt
Has the US Federal Reserve made a terrible policy mistake in raising rates? Photo: Jay Mallin/Bloomberg News By Jeremy Warner
7:00AM GMT 29 Jan 2016
Follow
236 Comments 'When the facts change, I change my mind. What do you do, Sir?” So reputedly said the British economist John Maynard Keynes. Economists are always changing their minds, but few practitioners of the “dismal science” do it quite as regularly as central bankers.
I’ve lost count of the number of times Mark Carney, Governor of the Bank of England, has signalled an interest rate rise, only to row back a few months later in the face of a softening economy, turmoil in the markets, or a plunging inflation rate.
On the other side of the pond, his opposite number at the US Federal Reserve, Janet Yellen, last month succeeded in pushing through the first US rate rise in nearly 10 years, but already she is being widely accused of making a grave policy error.
With panic in the markets, and the US economy showing renewed signs of weakness, there have been near hysterical calls for the Fed to reverse the decision. Rightly, it has so far chosen to ignore them. To change tack so quickly would indeed be a damning admission of failure.
If nothing else, the debate around this quite marginal rise in US rates demonstrates just how reliant on central bank stimulus, and sensitive to any changes in it, the world economy has become.
"Every time the markets sneeze, central banks are expected to step in with the resuscitator. If economies are ever to get back to normality, it is vital they stop this nonsense"
It beggars belief that a mere quarter point increase in the Fed Funds rate is going to make the difference between a recovering economy and one that plunges back into recession. Yet every time the markets sneeze, central banks are expected to step in with the resuscitator.
If economies are ever to get back to normality, it is vital they stop this nonsense.
In the early months of the crisis, the central bank response of cranking up the printing press seemed more than justified. Timely action by the Federal Reserve and the Bank of England prevented the crisis from turning into something very much worse.
But it is debatable how much good the monetary steroids have done since; arguably, they may now be doing quite a lot of harm. In advanced economies, at least, there is not much sign of the revival in investment spending the recovery needs to become self-sustaining. The overwhelming mood of international business leaders at the World Economic Forum in Davos last week remained one of extreme caution.
In the face of so many uncertainties, sitting on your hands and doing nothing has, for many chief executives, become the order of the day. Highly accommodative monetary policy doesn’t seem to be making a blind bit of difference to this hiatus in investment. “Animal spirits”, as Keynes described them, have failed to rekindle, despite the positive effect easy money undoubtedly has had on consumption. Unfortunately, growth cannot for ever be sustained on a diet of debt-fuelled household and government spending. It needs ultimately to be backed by rising business investment and productivity.
Speculative investment in stocks, bonds and property – the other main beneficiary of all that central bank support – seems even less likely to provide the foundations for sustainable growth. To the contrary, it serves only to make the world more vulnerable to bubbles and financial crisis.
If loose money has ceased to help, what are the alternatives? Most governments are too fiscally constrained to provide anything more in the way of demand stimulus. By chance, however, there is one unexpected bonus in the world economy right now – the low oil price.
For big consumer nations, lower oil prices act like a tax cut and therefore provide the equivalent of a fiscal boost. Just as very high oil prices mark the last hurrah of the boom, and therefore tend to push advanced economies into recession, low prices have in the past invariably had the reverse effect in front-running global recovery.
"Across the world as a whole, debt has continued to grow, and now stands at hitherto undreamt of levels relative to output"
Yet the temptation is to see the low oil price as a deflationary signal, a sign of stagnant demand, rather than the geopolitically complex series of positive supply-side shocks which provide the better explanation. In any case, its depressing effect on inflation has given the world’s leading central banks yet another excuse for keeping monetary policy ultra-accommodative.
The financial overlords of central banking may understand economics, money, and markets better than any, but they don’t have the answers and seem just as frequently to get it wrong as right. When a car skids, the best response is usually to turn the wheel into the skid rather than against it.
This approach has broadly instructed the central bank response – to treat a crisis caused by too much debt with yet more of it. Yet some skids are too extreme to counter. Across the world as a whole, debt has continued to grow, and now stands at hitherto undreamt of levels relative to output. Excessively easy money may have succeeded in temporarily mitigating the crisis, but its underlying causes remain very much with us. Thanks to the “Lords of Finance”, these disequilibria have got worse, not better.
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