{"id":2960,"date":"2014-10-13T18:58:13","date_gmt":"2014-10-13T13:28:13","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=2960"},"modified":"2014-10-13T18:58:13","modified_gmt":"2014-10-13T13:28:13","slug":"money-printing-is-ineffective-why-monetary-policy-as-we-know-it-is-nearing-its-death","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2014\/10\/13\/money-printing-is-ineffective-why-monetary-policy-as-we-know-it-is-nearing-its-death\/","title":{"rendered":"Money printing is ineffective: Why monetary policy, as we know it, is nearing its death"},"content":{"rendered":"

\"helicash\"<\/a>Vivek Kaul<\/span><\/span><\/span><\/p>\n

Everything under the sun is in chaos. The situation is excellent.<\/i><\/span><\/span><\/span>
\n<\/span><\/span><\/span>\u2013 Mao Zedong<\/span><\/span><\/span><\/em><\/p>\n

It has been a little over six years since the start of the current financial crisis in mid September 2008, when the investment bank Lehman Brothers went bankrupt. In the aftermath of the financial crisis the Western central banks went on a money printing binge.
\nEconomist John Mauldin in a recent column titled <\/span><\/span><\/span>The End of Monetary Policy <\/i><\/span><\/span><\/span>estimates that central banks have printed $7-8 trillion since the start of the financial crisis. It is worth pointing out here that this money is not actually printed, but created digitally.
\nAs John Lanchester writes in his wonderful new book <\/span><\/span><\/span>How to Speak Money <\/i><\/span><\/span><\/span>\u201cIt’s money that simply didn’t exist before. It’s like typing 100,000 at a keyboard and magically having \u00a3 100,000 added to your bank account.\u201d
\nHence, this money is not actual printed money. As Tim Harford writes in <\/span><\/span><\/span>The Undercover Economist Strikes Back<\/i><\/span><\/span><\/span>:<\/span><\/span><\/span> \u201cA lot of it is money…not actual printed ‘paper money’ but ‘printing money’ is the simple way to talk about this.\u201d
\nOnce this new money has been created it is used to buy bonds, both private as well as government. This has been done to pump money into the financial system and ensure that there is enough money going around to keep interest rates low.
\nAt low interest rates the hope was that people would borrow and spend more. This would create some demand and help economic growth. But has that really happened? The major creator of new money in the last six years has been the Federal Reserve of United States, the American central bank. It has printed (oops digitally created) around $3.6 trillion of new money since the financial crisis started. And it still continues to do so.
\nThe hope as Henry Hazlitt put it in his book <\/span><\/span><\/span>Economics in One Lesson <\/i><\/span><\/span><\/span>is that \u201cthis increased money [will increase]…everyone’s \u201cpurchasing power,\u201d in the sense of everybody to buy more goods than before.\u201d
\nNevertheless this hasn’t led to a jump in consumer expenditure. Household consumption forms nearly 70% of the American economy. <\/span><\/span><\/span>As economist Stephen Roach wrote in a recent column<\/span><\/span><\/span><\/span><\/span><\/a> \u201cIn fact, since early 2008, annualized growth in <\/span><\/span><\/span>real consumer expenditure<\/span><\/span><\/span><\/span><\/span><\/a> has averaged a mere 1.3% \u2013 the most anaemic period of consumption growth on record.\u201d
\nThis is reflected in the growth of the American GDP as well. As Roach points out \u201cThough $3.6 trillion of incremental liquidity has been added to the Fed\u2019s balance sheet since late 2008, nominal GDP was up by just $2.5 trillion from the third quarter of 2008 to the second quarter of this year.\u201d
\nHence, what economists call the \u201cmultiplier effect\u201d hasn’t really worked.
\nThe other hope was that all this new money would chase the same amount of goods and services, and this, in turn, would lead to some inflation. As prices would start to rise people would buy goods and services in the hope of getting a better deal.
\nBut that hasn’t happened either. As John Mauldin writes \u201cFrance has inflation of 0.5%; Italy\u2019s is -0.2% (as in deflation); the euro area on the whole has 0.4% inflation; the United Kingdom (which still includes Scotland) is at an amazingly low 1.5% for the latest month, down from 4.5% in 2011; China with its huge debt bubble has 2.2% inflation.\u201d The inflation in the United States is at 1.7%. This is below the Federal Reserve’s stated goal of 2%.
\nThe only developed country which has managed to create some inflation is Japan. The inflation in Japan is at 3.4%. So has the money printing by Japan managed to create some inflation? Not really. As Mauldin explains \u201cWhat you find is that inflation magically appeared in March of this year when a 3% hike in the consumption tax was introduced. When government decrees that prices will go up 3%, then voil\u00e0, like magic, you get 3% inflation. Take out the 3% tax, and inflation is running about 1%.\u201d
\nInstead of reviving consumer expenditure and creating inflation, all the printed money has been borrowed by institutional investors at very low rates of interest and been invested in financial markets all over the world. Stock markets in various parts of the world have seen huge rallies despite economic growth stagnating. Central banks have hoped that these rallies might lead to a wealth effect. Wealth effect is a situation where the rising value of the financial assets makes people feel richer and hence, spend more money.
\nBut that doesn’t seemed to have worked either. As Roach writes \u201cThe operative view in central-banking circles has been that the so-called \u201cwealth effect\u201d \u2013 when asset appreciation spurs real economic activity \u2013 would square the circle for a lagging post-crisis recovery. The persistently anaemic recovery…belie this assumption.\u201d
\nThis anaemic recovery is visible in the low economic growth rates prevalent through large parts of the developed world. As Mauldin writes \u201cThe European Union grew at 0.1% last year and is barely on target to beat that this year. The euro area is flat to down. The United Kingdom and the United States are at 1.7% and 2.2% respectively. Japan is in recession. France is literally at 0% for the year and is likely to enter recession by the end of the year. Italy remains mired in recession. Powerhouse Germany was in recession during the second quarter.\u201d
\nWhat all this clearly tells us is that what central banks call \u201cmonetary policy\u201d is not working as it is expected to. <\/span><\/span><\/span>Investopedia defines monetary policy as<\/span><\/span><\/span><\/span><\/span><\/a> \u201cThe actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rate.\u201d
\nThe irony of course is that even though the monetary policy is not working the central banks around the world don’t seem to be in a hurry to get rid of it. The money printing programme in the United States has more or less come to an end. Nevertheless, the Federal Reserve has made it clear that it is no hurry to withdraw all the money that it has printed and pumped into the financial system. Hence, it hopes to keep long term interest rates low for sometime.
\nOther parts of the developed world though are still going strong on money printing. As Ben Hunt,<\/span><\/span><\/span> Chief Risk Officer, Salient Partners,<\/span><\/span><\/span> wrote in a recent newsletter titled <\/span><\/span><\/span><\/span><\/span>Going Gray<\/span><\/i><\/span><\/span><\/span><\/span> <\/a>\u201cThe biggest thing happening in the world today is the growing divergence between US monetary policy and everyone else\u2019s monetary policy. There is a schism in the High Church of Bernanke, with His US acolytes ending the quantitative easing [the technical term the economists have given to printing money] experiment in no uncertain terms, and His European and Japanese prelates looking to keep the faith by continued balance sheet expansion.\u201d
\nDespite its non-effectiveness, central banks still have faith in monetary policy, as it has been practised over the years. And this might lead to monetary policy totally collapsing in the years to come.
\nTo conclude, let me quote Mauldin: \u201cSometime this decade (which at my age seems to be passing mind-numbingly quickly) we are going to face <\/span><\/span><\/span>a situation where monetary policy no longer works. Optimistically speaking, interest rates may be in the 2% range by the end of 2016, assuming the Fed starts to raise rates the middle of next year and raises by 25 basis points per meeting. If we were to enter a recession with rates already low, what would dropping rates to the zero bound again really do? What kind of confidence would that tactic actually inspire? And gods forbid we find ourselves in a recession or a period of slow growth prior to that time. Will the Fed under Janet Yellen raise interest rates if growth sputters at less than 2%?\u201d
\nThese are questions worth thinking about.<\/p>\n

<\/span><\/span>The article originally appeared on www.FirstBiz.com<\/a> on Oct 13, 2014\u00a0<\/span><\/span><\/span>
\n<\/span><\/span><\/span>
\n<\/b><\/span><\/span><\/span><\/strong>(Vivek Kaul is the author of the <\/span><\/span><\/span>Easy Money <\/i><\/span><\/span><\/span>trilogy<\/span><\/span><\/span>. <\/i><\/span><\/span><\/span>He tweets @kaul_vivek) <\/span><\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul Everything under the sun is in chaos. The situation is excellent. \u2013 Mao Zedong It has been a little over six years since the start of the current financial crisis in mid September 2008, when the investment bank Lehman Brothers went bankrupt. In the aftermath of the financial crisis the Western central banks … <\/p>\n

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