Project Syndicate:
Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's
chief economist, is a senior fellow at Yale University's Jackson
Institute of Global Affairs and a senior lecturer at Yale's School of
Management. He is the author of Unbalanced: The Codependency of America and China.
NEW HAVEN – The final
day of the summer marked the start of yet another season of futile
policymaking by two of the world’s major central banks – the US Federal
Reserve and the Bank of Japan. The Fed did nothing, which is precisely
the problem. And the alchemists at the BOJ unveiled yet another feeble
unconventional policy gambit.
Both the Fed and the
BOJ are pursuing strategies that are woefully disconnected from the
economies they have been entrusted to manage. Moreover, their latest
actions reinforce a deepening commitment to an increasingly insidious
transmission mechanism between monetary policy, financial markets, and
asset-dependent economies. This approach led to the meltdown of
2008-2009, and it could well sow the seeds of another crisis in the
years ahead.
Lost in the debate
over the efficacy of the new and powerful tools that central bankers
have added to their arsenal is the harsh reality of anemic economic
growth. Japan is an obvious case in point. Stuck in what has been
essentially a 1% growth trajectory for the last quarter-century, its
economy has failed to respond to repeated efforts at extraordinary
monetary stimulus.
Whatever the acronym –
first, ZIRP (the zero interest-rate policy of the late 1990s), then QQE
(the qualitative and quantitative easing launched by BOJ Governor
Haruhiko Kuroda in 2013), and now NIRP (the recent move to a negative
interest-rate policy) – the BOJ has over-promised and under-delivered.
In fact, with Japan’s real annual GDP growth slipping to 0.6% since
Shinzo Abe
was elected Prime Minister in late 2012 – one-third slower than the
sluggish 0.9% average annual rate over the preceding 22 lost years (1991
to 2012) – the so-called maximum stimulus of “Abenomics” has been an
abject failure.
The Fed hasn’t fared
much better. Real GDP growth in the US has averaged only 2.1% in the 28
quarters since the Great Recession ended in the third quarter of 2009 –
barely half the 4% average pace in comparable periods of earlier
upturns.
As in Japan,
America’s subpar recovery has been largely unresponsive to the Fed’s
aggressive strain of unconventional stimulus – zero interest rates,
three doses of balance-sheet expansion (QE1, QE2, and QE3), and a yield
curve twist operation that seems to be the antecedent of the BOJ’s
latest move. (The BOJ has just announced that it is targeting zero
interest rates for ten-year Japanese government bonds.)
Notwithstanding the
persistent growth shortfall, central bankers remain steadfast that their
approach is working, by delivering what they call “mandate-compliant”
outcomes. The Fed points to the sharp reduction of the US unemployment
rate – from 10% in October 2009 to 4.9% today – as prima facie evidence of an economy that is nearing one of the targets of the Fed’s so-called dual mandate.
But when seemingly
solid employment growth is juxtaposed against weak output, the story
unravels, revealing a major productivity slowdown that raises serious
questions about America’s long-term growth potential and an eventual
buildup of cost and inflationary pressures. The Fed can’t be faulted for
trying, argue the counter-factualists who insist that only
unconventional monetary policies stood between the Great Recession and
another Great Depression. That, however, is more an assertion than a
verifiable conclusion.
While policy traction
has been notably absent in the real economies of both Japan and the US,
asset markets are a different story. Equities and bonds have soared on
the back of monetary policies that have led to rock-bottom interest
rates and massive liquidity injections.
The
new unconventional monetary policies in both countries are obviously
missing the disconnect between asset markets and real economic activity.
This reflects the aftermath of wrenching balance-sheet recessions, in
which aggregate demand, artificially propped up by asset-price bubbles,
collapsed when the bubbles burst, leading to chronic impairment of
overleveraged, asset-dependent consumers (America) and businesses
(Japan). Under such circumstances, the lack of response at the zero
bound of policy interest rates is hardly surprising. In fact, it is
strikingly reminiscent of the so-called liquidity trap of the 1930s,
when central banks were also “pushing on a string.”
What is particularly
disconcerting is that central bankers remain largely in denial in the
face of this painful reality check. As the BOJ’s latest actions
indicate, the penchant for financial engineering remains unabated. And
as the Fed has shown once again, the ever-elusive normalization of
policy interest rates continues to be put off for yet another day....
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