The world is holding its breath, or at least that’s how it seems.
This coming Thursday is almost a mythical day – the day on which Janet Yellen, chair of the U.S. Federal Reserve System’s board of governors, decides whether she should raise interest rates. It would be the first time the Fed’s benchmark rate has been raised since 2006.
It would be the first step, if just a tiny one, towards normalizing monetary policy in the aftermath of the 2008 financial crisis.
The enormous importance of this event, which is actually supposed to be a non-event, highlights how ludicrous and bizarre our world has become. It’s a world in which central bankers are by far the most powerful decision-makers about economic policy. A world that can definitely be characterized as a central bank-planned economy.
In fact, central bankers are supposed to quietly and unobtrusively ensure that the sensitive mechanical gears of the modern market economy run smoothly – with instruments that are limited in terms of their manageability and efficiency.
But the eight-year battle against the global financial meltdown has made hands-on money managers of the one-time agency heads.
Take the head of the European Central Bank, Mario Draghi, who, with his brash measures, is being praised as a hero in many places. At the same time, he is well on his way to making the ECB the largest creditor of the European states.
Or take Mark Carney, the urbane head of the Bank of England, whose central bank has quintupled its balance sheet totals since 2007.
Or Ms. Yellen. These days she’s expected to set a monetary policy for the entire global economy, contrary to her legal mandate to focus on the domestic situation.
The world of the central banks has gone off the rails – and it's high time to send a clear signal.
The International Monetary Fund and the World Bank are asking her to perhaps consider, if she would be so kind, the potential consequences of a change in U.S. interest rates for the emerging nations.
The world of the central banks has gone off the rails – and it’s high time to send a clear signal – for a number of reasons.
First off, the U.S. economy is in an extremely robust condition at present. In this and the coming year, it’s gross domestic product will grow by almost 3 percent, respectively. The unemployment rate is at 5 percent – not far from what the Fed itself defines as full employment.
Inflation is low, but most of all because the price of energy has dropped so drastically – an effect that only central bankers are taking to be a threat. The majority of national economies are profiting from the additional buying power, which is running into the billions and is not being offset by new debts.
From a domestic U.S. economy point of view, therefore, if the interest rate isn’t to be changed now, then when?
Secondly, with the raising of the benchmark rate, the most powerful central bankers of the whole world will be sending a message that says: “Look over here, we declare the financial crisis to be over!”
That would not only be a sign of confidence for the whole global economy, but it would also be the first real proof that a central bank is even thinking about shifting into normal mode after years of unconventional monetary policy.
Thirdly, as commendable as the robust intervention by the central bankers may have been at the peak of the financial crisis, disillusionment is now spreading concerning the efficiency of the unconventional monetary policy. The limits of its power are increasingly becoming evident.
Although the money managers can flood the banks with money, they can’t clean up the banks’ balance sheets. They can artificially keep government refinancing costs low through quantitative easing, but they can’t create jobs with it.
Lending in Europe is so weak not because the banks lack liquidity, for instance. It is weak because past bad investments first have to be written off before new ones are possible.
The cautionary example for all of those who believe in the almighty power of central banks is Japan. The world’s third-largest economy is now in its ninth round of quantitative easing.
And yet growth continues to be extremely weak, and government debt is now two and a half times the size of the country’s economy.
Japan has demonstrated one thing, and that is no correlation exists whatsoever between the size of a central bank’s balance sheet and the size of economic growth.
And the inevitable bursting of financial market bubble – in Japan at the start of the 1990s, in the United States and Europe beginning in 2007 – and the subsequent extremely painful process of debt relief leaves the central banks facing insurmountable problems.
That is why it should be in the vested interests of a central banker to prevent the creation of a bubble. And the best way to do that is to raise the benchmark interest rate on time.
Ms. Yellen, hear our call!
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