As many of the world’s central bankers and some of the great economists gather in Jackson Hole to compare notes about the state of their own and the global economy, it is enlightening to consider the backdrop to the meeting.
Countries that account for about 60% of global GDP — that is, the US, UK, Canada, the eurozone and Japan — have had their policy interest rates at 1% or less for close to four years. In the case of Japan, it is nearly two decades of zero interest rates.
Government debt in those countries alone is about $US60 trillion (about $US65,000 per person) and none are close to getting a balanced budget.
On top of those quite remarkable policy settings, most of the central banks in question have undertaken a range of so-called “unconventional monetary policy” actions. These have focused on quantitative easing, in other words printing cash, or intervening in bond markets for mortgage and other non-government debt as they strive to push borrowing interest rates lower.
This staggeringly stimulatory economic policy is still in place, yet all of these countries are registering feeble rates of economic growth, have high unemployment and for some reason seem reluctant to deliver a further bout of policy stimulus.
There are almost 30 million people unemployed in these countries, a massive social and economic problem that needs to be addressed. This is where the discussions at Jackson Hole and beyond that talkfest might be enlightening.
So far, these central bankers have resisted the pressure to implement further stimulatory measures to address the dysfunctional economies they help manage. Each central bank no doubt has a few ideologically driven inflation hawks who at every opportunity would argue against monetary policy being eased too far or for the unconventional policies to be too market distorting.
In the US Federal Reserve, there are the likes of Richard Fisher and Charles Plosser, who seem to be arguing for a fight against an imaginary inflation problem. In Europe, there is a long list of ECB officials, mainly from Germany, who think the central bank has done more than enough and that the onus now is on the problem countries to deal with their own economic mess.
These are the people who should bear a significant part of blame for the protracted economic malaise.
Desperate times require desperate policies. To be sure, near zero interest rates, printing money, intervening in bond markets and nationalising banks and insurance companies (at least in part) are radical. They would not have been fathomable five years ago. But these policies, while helpful, have not gained the traction to drag economic growth to a more desirable pace and make lasting inroads into the unemployment rate.
The solution is clear. For central banks, it is more quantitative easing. Buy bonds, push borrowing costs lower. The risk of inflation is low and given the current degree of malaise, a little bit of inflation would be no bad thing if it were to emerge. And an inflation blow out, were it to occur, could be dealt with later.
It is encouraging to see the European policy makers warming to the notion of QE.
French President Francios Hollande has boldly noted that it is within the European Central Bank’s mandate to intervene in the bond market. ECB President Mario Draghi, who said earlier this month that the ECB would do “whatever it takes” to keep the eurozone together, will next week outline the extent of the bond buying program. Other ECB officials have been increasingly outspoken in support of bond market intervention but most make the point that strict conditions, usually linked to fiscal austerity, be maintained in return for the bail out policies being implemented.
The need for new policy action has been brought into focus with a further run of poor economic news. The European Commission’s estimate of eurozone consumer confidence fell to a fresh three-year low of -24.6 points. This is around the level reached during the depths of the 2008-09 crisis.
For Fed chairman Ben Bernanke, who will be delivering the keynote address in Jackson Hole tonight Australian time, there is the reality that GDP growth is locked in below 2%, the unemployment rate has stopped falling and remains above 8%, that consumer spending remains subdued and inflation is low.
Overlaying all of this is the slump in commodity prices as the Chinese economy loses more momentum. Iron ore prices have fallen by more than 30% in the past few months, while coal and energy prices are also well off their peaks.
The slowdown in China is spreading through Asia with South Korea limping along, Vietnam slowing and the Japanese economy remaining weak.
At the most basic level, stimulatory policies are needed, not only in Europe, but also in the US, the UK and throughout Asia. This means extra quantitative easing for those who cannot cut rates to below zero per cent and rate cuts for those who have room to lower them further, including our own Reserve Bank.