We will give global policymakers their due. We agree neither with their goals nor with their methods. Further, we do not believe that their methods will deliver broad economic and social goals: diffused prosperity, reduced inequality and social stability. Our horizons are different, too. But we have to evaluate them against their goals and not ours.
They have wanted to keep economies muddling through since no boom is likely now. Towards that end, they have done several things. For one, they have made sure that interest rates lose their salience as the variable that equilibrates savings and investment. They have allowed money to flow into banks, allegedly for onward lending to the real economy, against all types of collateral. Last we heard was that paper towels in bank kitchens would be acceptable to the European Central Bank as collateral. They have made sure that commodity prices decline.
At the same time, they have managed to prevent signals from declining commodity prices flowing through to stock markets. Stocks would normally be in a state of funk if oil prices declined 20% or more due to worries over economic growth. Instead, the Dow-Jones Index is above 13,000; the S&P 500 is above 1,300 and the DAX index is above 6,000. Even the Sensex has rallied around 1,000 points since the beginning of June. A combination of willing proprietary traders, sovereign wealth funds, central banks, government slush funds, government-owned enterprises, summit meetings and old-fashioned rumours has been put to work to keep stock prices from falling.
But the manipulation will not be costless. These actions are convoluted at best and diabolical at worst. Let us take the case of India, for example. This columnist praised the Reserve Bank of India (RBI) for holding interest rates steady. However, on calmer reflection, RBI’s monetary policy appears to be hopelessly knotted.
Credit Suisse research notes that purchase of government bonds by RBI has amounted to an annualized 3.4% of gross domestic product in 2012, based on data on RBI bond purchases in the first 73 days of the fiscal year 2012. About 30% of these purchases have been unannounced. They note stoically that there has been no empirical correlation between M3 money supply growth and Wholesale Price Index inflation in India, but that periods of high and volatile inflation are coincident with high deficit monetization by RBI.
So, let us see what is happening. RBI holds interest rates steady. Private sector cost of borrowing does not come down. Public sector borrowing costs are held down by its bond purchases. Further, the public sector garners most of the savings and liquidity with its disdain for restraining spending and spending meaningfully. The government announces a hike in the minimum support price for agricultural produce, while consumer price inflation reigns above 10%.
So, what we have is a central bank that cites inflation concerns and holds rates steady, but monetizes the budget deficit in record sums; a government that is supposedly pro-poor, but ensures double-digit inflation with its fiscal irresponsibility; investors (who are they?) who bid up stocks and sell the currency. Even a good criminal novel-writer could not have created such a convoluted set of circumstances, goals and actions.
Let us move further north-west. In yet another novel way of printing money, the Bank of England and the UK treasury decide to lend banks large sums of money at low rates of interest so that they would lend that money to small- and medium-sized businesses. This is what previous programmes of money printing aimed to achieve. For all intent and purposes, they have not been effective. If a medicine is not working, two options can be considered. One is to change the medicine and the other is to increase dosage. Globally, policymakers choose the latter course invariably. An indebted society needs to save and should be incentivized to do so nor is there much point in encouraging banks to add to the mountain of debt that needs to be shrunk first. Yet, officials and their cheerleaders in the academia and in media can only thoughtlessly resist seeing the folly of their ways.
In Europe, the European Central Bank (ECB) and the Bundesbank engage in so much open shadow-boxing that one dies of laughter, watching it. The Bundesbank has a nominee in the ECB governing board. Yet, the Bundesbank president and their reports gravely warn ECB that its actions make the euro worthless. ECB lowers credit requirements for the collateral it accepts and reduces margin requirements even as German government officials confide to local newspaper editors that it is difficult to keep Greece within the euro zone and the Spanish think that Germany would kick them out eventually (http://reut.rs/L3HVqa).
Economic policymaking and analysis are suffering from some combination of hubris, ignorance, crass selfishness and indifference to social consequences. Globally, leaders cannot and do not lead. That is less of a tragedy than the fact that the rest of us have not grasped it, yet.
V. Anantha Nageswaran is an independent financial consultant based in Singapore. Comments are welcome at firstname.lastname@example.org
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