It began in Seoul on Sunday and ended in New Delhi on Saturday. In between, the journey practically covered the whole world. It covered Hong Kong, Taipei, Tokyo, Beijing, Oslo and Washington, DC. It is even possible that I left out some other stops along the way. I am referring to the odyssey of interest rate cuts by central banks that began with a 75 basis points rate cut by Bank of Korea on Sunday and ended on Saturday, 1 November, with the Reserve Bank of India (RBI) announcing a spate of measures.
It is hard to escape the thought that, by deploying the blunt instrument of interest rates, they are setting the stage not for a recovery but an eventual harder landing for their economies in three-five years.
Take the case of Japan. The Bank of Japan cut rates from 0.5% to 0.3% on Friday. What good purpose would it serve? Ageing societies have lower growth and lower interest rates. Instead of educating the public that low interest rates reflect low potential growth and hence low returns on assets, policymakers not only try to defy the natural process with artificial attempts to boost growth, but also watch with indifference and even encourage the attempts of citizens to defy this natural and inevitable low-gear ride by taking on debt.
Low interest rates encourage the public to remove funds from banks and plonk them in the stock market either locally or overseas. At once, it destabilizes the banking system as banks are forced to rely on the money market for funding their operations and not the safe and reliable deposits from the public. At the same time, it raises the risk of stock market bubbles as too much money chases too few opportunities for returns in an ageing economy. If the money leaves the shores, then it not only exposes the investors to exchange rate risk but it also distorts asset prices overseas.
Savers not only scoff at low interest rates on bank deposits but also see the low rates as an invitation to take on more debt. This is how ageing societies enhance systemic risk for their own countries and also globally. This has been witnessed in Korea, Japan, Switzerland and Singapore. This is the backdrop for the Bank of Japan cutting interest rates again from 0.5% to 0.3%. That is why I find nothing to cheer in the Bank of Japan offering this rate cut.
Let us now take the case of China and India. Both of them adamantly repeat that they would grow between 7% and 9% in the coming years and that there are no problems with their economies. Yet, the People’s Bank of China cut rates three times in two months, besides lowering cash reserve ratios, while RBI pulled out all stops, once before the scheduled monetary policy meeting and once after, with inexplicable inaction at the scheduled policy meeting.
It is one thing to help financial institutions and other economic agents with dollar liquidity since global banks have taken to hoarding cash. But it is another thing to flood the domestic financial system with liquidity. Why is there a domestic liquidity problem in China and India?
If the growth outlook is as good as is being claimed and if inflation is far from settled, the public is entitled to demand and to receive proper rationale for the desperate policy measures now being taken to boost domestic liquidity. Instead, desperate measures taken on weekends come with confident statements on the economy. Where are the advocates of transparency in monetary policy now?
In India, if there has been a rise in financial distress in the domestic banking system and outside beyond tolerable levels, then it is essential for the future sustainability of economic growth and stability of the financial system that the facts become known. In the US, in fits and starts, soul-searching is on and practices in rating agencies, in banks and decisions made by regulators are being made public. India and China are, in contrast, remarkably opaque.
Just as ageing societies cannot defy natural process, growing societies too cannot. If the former are too weak to shoulder leverage, the latter are too unprepared to handle it. Yet, both have committed the crime of splurging on debt. The tragedy is that the price is being borne by everyone else and not just those who indulged in it.
If the answer to the problems created by unbridled greed, ambition, crony capitalism, corruption and debt is more of the same, the current turmoil will not have a happy ending. Those at the helm of affairs have a lot to answer for. The tragedy is compounded by the fact that the right questions are not being asked either by the media or by the political opposition.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at firstname.lastname@example.org