Why The Fed, by itself, cannot deliver a sustainable recovery?
ABSTRACT
The Great Recession of 2008, after wrecking the balance sheets of the largest banks in the US and in Europe, ended up saddling the governments behind them with the most invasive fiscal deficits in recent memory. With gross government debt as a % of GDP sitting at precarious heights everywhere– the US at 105, many EU countries over 100, Japan off the curves at 245 – all hopes for stimulating economic growth were anxiously pinned on unconventional monetary policies, with the US Federal Reserve taking the lead among world’s central banks.
Six years later, despite exceptional measures with record low interest rates and unusually bold QE by many central banks, especially the US, it is still unclear that the path to sustainable growth for the rich countries of the world has been found. Furthermore, the sovereign debt of world’s largest countries remains a problem signaling probable “currency wars” ahead.
As importantly, it also seems that the lessons from Japan’s 20 year-long struggle to overcome stagnation with cheap and abundant credit are not being heard: QE and ZIRP just buy time to get debts and deficits in order, but they do not eliminate them. Not only there is no magic, but excessively low-cost credit has already demonstrated to widen income distribution disparities to undesirable levels, weakening thereby consumer spending on which the recovery depends.
There is little doubt that in most of the Western World structural reforms for attaining fiscal rectitude are politically challenging to pursue. But repressing savers while inviting asset-based inflation with exceedingly low interest rates have also proven unlikely to generate nationally constructive business investments, increased consumer spending or improved confidence about the future – all essential ingredients to sustainable economic growth.
The time has come for the rich nations of the world, especially the US, to stop abdicating to their central bank economic growth responsibilities which it cannot carry out on its own.
