Just when the central bankers think they’re out, economic reality keeps pulling them back in:
Since the crisis began, there have been several apparent economic springs, prompting the Fed to cease asset purchases, only to be forced back to the printing press again when the economy flagged. What may be different this time is that central bankers as a breed are losing their nerve in the pursuit of unconventional monetary policy. Some now openly question its effectiveness in stimulating the real economy. Others worry about its distributional consequences, with debtors favoured at the expense of savers. Still others worry about the re-emergence, in the hunt for yield, of asset price bubbles. They also worry about loss of independence, with QE now quite widely seen as a form of government financing. In almost all cases, there is growing concern about the sheer scale of balance sheet expansion.
Are these worries well founded? Most certainly. But are they enough to justify a return to a more normal interest rate environment? Not as long as deflation and a weak economy remain the primary risks for many advanced economies.
Central banks seem caught on a treadmill of money printing, where even the merest hint of exit threatens another financial crisis. This, in turn, would require a further dose of money printing to blow away the consequent economic fallout. There’s no escape.
Well, there are two, to be precise. Ice and fire. Inflation or deflation. I hope to return to the subject next week; this is a rather busy one for me. But it is interesting to see mainstream reports about central bankers losing faith in the effectiveness of Neo-Keynesian stimulation.