Wednesday night’s panic in Tokyo, where the Nikkei dropped a stomach churning 7pc, kicking off a global chain-reaction that saw the FTSE fall 143.48 points, demonstrates just how difficult it is going to be for the world’s central banks to exit their loose money policies.
It’s not even as if Ben Bernanke, chairman of the Fed, said he was planning to exit; in fact, initially he said the reverse, in testimony to Congress. It was only in the Q&A, and in minutes to the last meeting of the Fed’s Open Markets Committee, that a clear bias emerged to slow the pace of asset purchases “in the next few meetings”, so long as the economic data were strong enough.
What the subsequent violent gyrations in markets indicate is that any hint of applying the brakes risks generating a fresh financial crisis, which, in turn, would render the economic recovery still-born.
Both financial markets and the real economy have become addicted to “quantitative easing”. So much so that they cannot do without it.
The upshot is that we are going to see financial repression of the type being practised in virtually all the major advanced economies – including, if only to a more limited extent, the eurozone – continue into the indefinite future.
There are only three ways to deal with a big debt overhang. The hard way is to try to work your way out of it, or to cut your cloth according to your circumstances. More often than not, this proves self-defeating. The austerity required ends up shrinking the economy, thereby further increasing the size of the debt burden.
You can also default, but it will take years, even decades, to win back the confidence of capital markets after such an event, or you can do what Britain, and now Japan, are attempting, and inflate your way out of it.
Central bankers dream of getting back to “normal” – normal interest rates, a normal balance sheet and so on – but that point isn’t going to come any time soon. They are stuck on a money printing treadmill and there appears no way off.
Full article: Central banks are stuck on a money printing treadmill (The Telegraph)