With the world's central bankers at Jackson Hole discussing the state of the world economy, we are seeing something that is hard to believe. According to news reports, the bankers are lamenting their inability to generate higher inflation. The idea is that some inflation is needed to cause economic growth to speed up. Inflation will also reduce the real amount of debt undertaken by various governments. Think of it this way: if inflation ran at 2% for twenty years, the twenty trillion dollars of American government debt currently on the books would only be worth the equivalent of roughly eleven trillion of today's dollars. We could pay back debts incurred with today's currencies with equal face amounts of the future's less valuable currencies. The main storyline is that the bankers have gotten to the point where there is little more they can accomplish with monetary policy; they need "bold action" by the governments in using fiscal policies to increase economic growth.
Here's the big flaw in these stories: The central banks around the world have already flooded their economies with excess cash. Just in the USA, the Federal Reserve pumped something like three trillion dollars in new cash into the money supply in the last eight years. That more than tripled the money supply from where it was in 2008. In Europe and Japan, similar moves have been made. The world is awash with cash. All that cash has done next to nothing with regard to restoring vigorous economic growth. The new cash is sitting in bank vaults; it is not being used for investments or purchases. The bulk of the cash that actually gets used is going for speculation in stocks, commodities, and other items. Those sorts of uses for the new cash do not lead to fast economic growth.
With these failures in place for monetary policy, one might expect the bankers to look for new methods to help grow the economies. The bankers, however, seem unable to move beyond their current failed policies. Indeed, some bankers are stymied because moving away from current policies carry with it a risk that the bubble in stock values will burst, inflation will return or we will see a recession. Just look at the Federal Reserve. The Fed finally stopped the worthless activity of so called quantitative easing. Nevertheless, the Fed just won't raise interest rates to more appropriate levels. Instead, America moves along with historically low interest rates that deprive savers of a return and push the stock market to new levels of speculation. Of course, each time the Fed talks of raising rates, the stock market shudders and the Fed backs off. Ultimately, when the bubble bursts, it will just be a bigger disaster. Indeed, with all the excess cash in place, one has to wonder what will happen once the economy actually does start growing. If the USA had a year with strong growth, we might see all that cash tumble out of its hiding places and make its way into the economy. If inflation were to return as the Fed wants, we could see the boatloads of cash take inflation way past the 2% target and move it to levels last seen 35 years ago. The damage done to our economy by a few years of 15% inflation would be hard to calculate, but it would be enormous.
The reality of the news about the central bankers is this: we know that these people are wedded to their mistakes of the past. They seem unable to look beyond the common wisdom (which also happens not to work.) The world faces a potential disaster and we have bankers who don't seem to notice.
Here's the big flaw in these stories: The central banks around the world have already flooded their economies with excess cash. Just in the USA, the Federal Reserve pumped something like three trillion dollars in new cash into the money supply in the last eight years. That more than tripled the money supply from where it was in 2008. In Europe and Japan, similar moves have been made. The world is awash with cash. All that cash has done next to nothing with regard to restoring vigorous economic growth. The new cash is sitting in bank vaults; it is not being used for investments or purchases. The bulk of the cash that actually gets used is going for speculation in stocks, commodities, and other items. Those sorts of uses for the new cash do not lead to fast economic growth.
With these failures in place for monetary policy, one might expect the bankers to look for new methods to help grow the economies. The bankers, however, seem unable to move beyond their current failed policies. Indeed, some bankers are stymied because moving away from current policies carry with it a risk that the bubble in stock values will burst, inflation will return or we will see a recession. Just look at the Federal Reserve. The Fed finally stopped the worthless activity of so called quantitative easing. Nevertheless, the Fed just won't raise interest rates to more appropriate levels. Instead, America moves along with historically low interest rates that deprive savers of a return and push the stock market to new levels of speculation. Of course, each time the Fed talks of raising rates, the stock market shudders and the Fed backs off. Ultimately, when the bubble bursts, it will just be a bigger disaster. Indeed, with all the excess cash in place, one has to wonder what will happen once the economy actually does start growing. If the USA had a year with strong growth, we might see all that cash tumble out of its hiding places and make its way into the economy. If inflation were to return as the Fed wants, we could see the boatloads of cash take inflation way past the 2% target and move it to levels last seen 35 years ago. The damage done to our economy by a few years of 15% inflation would be hard to calculate, but it would be enormous.
The reality of the news about the central bankers is this: we know that these people are wedded to their mistakes of the past. They seem unable to look beyond the common wisdom (which also happens not to work.) The world faces a potential disaster and we have bankers who don't seem to notice.
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