It is possible that economic historians, documenting the first decade of the new millennium, would hold global policymakers—particularly from the developed world—guilty of crimes against humanity? It may sound too harsh. After all, such a charge is laid at the doors of killers and not that of academics-turned-policymakers. The problem is that the decisions made by policymakers have an insidious, far-reaching and longer-lasting effect than even that of blood-hungry dictators.
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Lest it be misunderstood that Bare Talk has better answers or that Bare Talk judges the tasks of policymakers to be an easy one, the charge laid at their doors is that they have been insufficiently honest about the uncertain and unpredictable effectiveness of their policy choices. Put differently, they have refused to acknowledge the limitations of their understanding of the strengths and limitations of economic theories. Tragically, academics outside the policy circle have closed ranks behind them instead of being on the side of the public.
For instance, let us take Japan. It is a country with an ageing population and a shrinking labour force. Potential gross domestic product growth falls in such situation. Savers consume their savings as they age. Inflation and low interest rates are the threats they face in maintaining a certain standard of living. Hence, Japan’s deflation has been a godsend to them. Now the Bank of Japan, under prodding from the government, is beginning to engage in unsterilized interventions in the foreign exchange market. Would it necessarily help revive Japanese industries, or would it cause savings to flee the country in search of higher yields elsewhere? Japanese outflows would elevate asset prices elsewhere in the world. When the crash comes—as it inevitably does —it causes havoc in the host countries and destroys lifetime savings for many Japanese, too.
In the US, academics keep berating the government for not stimulating enough. It is almost as though there are no costs to such a stimulus, coming on top of what has been unleashed since 2008. Recently, the US Federal Reserve promised more of what it did in 2001-03 and 2008-09, and investor behaviour has now trapped the institution into this course of action. It cannot backtrack even if it wishes to. It is again captive to the whims of the capital market. But we are glimpsing what is in store for us. It is not pretty.
Food and crude oil prices have been rising steadily. Into the combustible mixture of climate change and poor harvest, central bankers are pouring the oil of liquidity. Scorching summer in Russia, unprecedented rain in Pakistan and a sea of central bank money are lighting the fire under commodity prices. Over the weekend, the Financial Times warned of a food crisis.
Given the US dollar’s reserve currency status, the Fed leaves other central banks with no choice but to adopt competitive debasement of fiat money as their policy goal too. The consequences of sustained and coordinated debasement of fiat money on a global scale are hard to predict. There is no guarantee that policymakers would succeed in their attempt to pump up demand, except to cause asset prices to decouple more from their fundamental moorings. If they succeed, they might succeed too well in inflating all prices, causing misery to millions of poor who do not exclude food and energy from their daily lives. Rising asset prices and soaring commodity prices are sure recipes for widening inequality and social instability.
The International Monetary Fund has reduced its global growth forecast for 2011 from 4.8% to 4.2%. But the question of whether the world economic growth between 2002 and 2007 was unsustainable in more ways than one has not been posed or answered. Why is it not possible for nations to accept that a more solid foundation than elevated asset prices are required for sustainable economic growth? The US is inflating asset prices as the answer to the problem that inflated asset prices caused.
The stock response to that question is that policymakers cannot afford to wait for old-fashioned savings and investments to work as the threat of deflation raises the real value of debt in the system. Then the question is, why they have been in a perpetual fire-fighting mode since the dawn of the decade and why they did not address fundamental imbalances when survival was not a pressing concern? More importantly, what have they done to eliminate the incentives in the financial system that caused and aggravated the savings-investment imbalance?
Central bankers should be more forthcoming about the range of outcomes that their actions might create. They should be more and not less accountable than doctors are to their patients when they initiate any new treatment or procedure. With their reluctance to be upfront, either out of overconfidence or out of fear of letting the unpalatable truth out, they risk a far greater crisis than the one that investment bankers caused two years ago. Historians would be hard-pressed to judge the worst crime of the two.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org