Trillions of dollars have been spent on stimulus by central banks in the developed world since the financial crisis began in 2008. Clearly these policies haven’t worked – but they are now lining up to do more of them.
In this interview with Tom Brown, deputy editor of ICIS news, I argue that their analysis is fundamentally flawed – how can central banks possibly control the economic fortune of the world’s 7.3bn people? I also worry that the same people who tried to warn about the 2008 crisis are now giving urgent warnings about likely problems ahead.
William White, former chief economist of the central bankers’ bank (Bank for International Settlements) is now warning (his emphasis):
“If you think about a crisis period as a period of deleveraging, in fact this has not happened and we’ve gone in the very opposite direction. Now, on the household side, clearly there have been some improvements made but on the corporate side in the US, things have gotten significantly worse – the debt ratios for corporations have gone up very substantially as has government debt…
“More importantly – again, when I say the situation is worse today than it was in 2007 – in 2007 this debt problem was essentially confined to the advanced market economies. Since then, the debt ratios – the private debt ratios in particular – have exploded in the emerging market countries and so we now have in a sense a global problem whereas in 2007 you might say we had a regional problem with the advanced market economies. But now it’s basically everywhere so, yes, I do think that the situation is worse than it was then…
“When I first came to the BIS in 1994, we started warning about the credit flows into Southeast Asia well before the Asian crisis happened and… it was in the early 2000s that we really started to focus on what was going on in the advanced market economies… The story that we were telling then was really one of the Greenspan put starting in 1987 and every time there was a problem, the answer was to print the money or ease monetary conditions and the debt ratios ratcheted up and up and up…
- “So we had this problem in ’87 and the answer was easy money
- Then we had this problem in 1990-1991 and, again, the answer was easy money
- The response to the Southeast Asian crisis was, don’t raise rates even though all sorts of other indicators said you should
- Then it was easy money again in 2001 and, of course, in 2007…
Every time the headwinds of debt have been getting higher and higher and the monetary easing required to overcome that has had to get greater and greater and the logic of that takes you to the point where you say, well, in the end, monetary easing is not going to work at all and… that’s where I am today… Unfortunately, we are still, as far as I can tell, both the BIS and myself are still talking to a brick wall…
“To put it in a nutshell, if it’s a debt problem we face and a problem of insolvency, it cannot be solved by central banks through simply printing the money. We can deal with illiquidity problems, but the central banks can’t deal with insolvency problems…In a way, I think the economists have made what the philosophers would call a profound ontological error. They have assumed that the economy is understandable and they have therefore assumed that if they can understand it they can control it.”
Similarly, Bill Gross – formerly of PIMCO and now at Janus – warns as follows in his latest update:
“And that’s not the end of it. If negative interest rates fail to generate acceptable nominal growth, then the Milton Friedman/Ben Bernanke concept of helicopter money may be employed. …Can any/all of these policy alternatives save the “system”?
We shall find out, but current evidence of the past 7 years’ experience would support only a D+ report card grade. Barely passing. As an investor though – you should be aware that our finance based economic system which like the Sun has provided life and productive growth for a long, long time – is running out of fuel, and that its remaining time span is something less than 5 billion years….
“Summer, for our credit based financial system, is past and a shorter winter-like solstice is in our future. Be prepared for change.”
