Quantitative easing, and all the other facets of the extraordinarily loose monetary policy that's been in place globally for the past half decade or so, can only be described as a success if you posit the counterfactual: if central banks hadn't done all these things, the situation would now be much worse. You can never prove a counterfactual, of course, but what you can say is that "QE and all that" has not had the impact that either its proponents or its opponents expected.
Proponents of extreme monetary ease believed that it represented the only way of getting economic growth moving after the crisis, particularly given that many governments were determined to pursue fiscal austerity. Its opponents, on the other hand, feared that inflationary forces would be unleashed, reversing all of the central banks' good works over the past couple of decades. Neither has proven true. Because so much of the new money pumped into the system by central banks has simply found its way onto corporate balance sheets -- there to be termed "dead money" by newly-departed Bank of Canada Governor Mark Carney -- growth has remained sluggish, and as a result inflationary pressures are nowhere to be seen.
Against this background, the strong performance of major world stock markets in the first half of 2013 bears close scrutiny. One positive factor has, of course, been the early success of the"Abenomics" stimulus program in Japan, even though prospects for self-sustaining growth there still hang in the balance. And there have certainly been signs of improvement elsewhere -- steady employment growth, strong auto sales and a bounce in house prices in the US, broad-based signs of recovery in the UK, solid progress across the board in Canada*, and so on.
However, investors are clearly concerned that at some point in the near future, central banks may conclude that the evidence of recovery taking hold is sufficient to allow them to start unwinding QE. A gentle warning to this effect from the Fed in late May caused shudders in the market, and since then, stocks have had trouble building on their previous gains even as the flow of data has been mainly positive.
Markets are right to be worried. Dallas Fed President Richard Fisher warned as long ago as last September that "no central bank anywhere on the planet...has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank — not, at least, the Federal Reserve — has ever been on this cruise before." And of course, if central bankers really were as smart as some people once believed them to be, we wouldn't all have gotten into this mess in the first place.
Once the reversal in policy starts, probably around the end of this year, we'll see if they've become any smarter as a result of the crisis. Soon after that we should be able to opine on the success of QE without using a counterfactual: the measure of success will be how well the global economy fares without it.
* One complication for policymakers in Canada is the overheated condominium market in the Toronto area. It's not so much that too many are being built -- the area's population is growing strongly -- but that too many are being bought and rented out by get-rich-quick investors. It remains to be seen how many of those investors will be able to bear even a small rise in interest rates. Paul Krugman has some thoughts on this here.
No comments:
Post a Comment