A monetary Wizard of Oz? From today’s WSJ editorials:
Central bank stimulus can’t last forever.
If you want to know who rules the world economy these days, Wednesday was instructive. In Europe, central bank chief Mario Draghi waved his hand and lent European banks another few hundred billion euros at 1%. (See below.) And in Washington, Federal Reserve Chairman Ben Bernanke roiled markets in Treasurys, stocks, commodities, etc., when he told Congress . . . well, no one seems sure of what he really said, or at least what he meant.
So it goes when central bankers take it upon themselves to save the world economy.
And, man, are they ever trying. The most important economic news in recent weeks has been the global flood of monetary easing. Wall Street economist Ed Hyman sends out a useful daily summary of world economic news, and his top headline on Monday was “Massive Global ‘QE’,” as in quantitative easing.
In addition to the European Central Bank’s liquidity burst, China is easing its reserve requirements to stimulate more bank lending. The Bank of England has been all-in for some time, and the Bank of Japan recently joined the party. Lesser central banks have been following suit, as the world takes its cues from the grandest monetary maestro, Mr. Bernanke, who has announced that the Fed will keep interest rates at near-zero for another three years.
The Fed’s policy is intended to reassure business and investors about monetary stability, but you wouldn’t know it from the response to Mr. Bernanke’s testimony yesterday on Capitol Hill. The economy has been doing better of late and fourth-quarter growth was revised upward yesterday to 3%, but Mr. Bernanke was downbeat and seemed to suggest unemployment won’t keep falling. Rising oil prices are a problem, he added, but any burst of inflation will be “temporary.”
Would he rule out another round of bond purchases, a QE3? No, but he didn’t foresee another round anytime soon either.
What this means for policy, who knows? But the dollar promptly rose, gold plunged $90 an ounce, silver took a bath, stocks fell despite other good economic news, and Treasury yields rose.
It seems that some investors had been hoping for even more monetary stimulus, and so they had to cover their long bets on riskier assets like gold when Mr. Bernanke disappointed them. Stocks, which have also been riding the liquidity wave, respond as much to monetary portents these days as they do to news about the economy.
The larger point is the inherent instability of growth rooted in easy money. For a time, and especially in a crisis or recession, monetary policy can supply vital liquidity and arrest a collapse of confidence. But sooner or later as growth recovers, the easing has to stop before it begins to produce even more instability.
The current moment of “massive global QE” is helping stocks, which boosts confidence, but it is also lifting commodity prices, which undermines consumer spending and business confidence. Far from increasing stability, Mr. Bernanke’s extraordinary monetary efforts are keeping everyone guessing about his next move. An economy that hangs on the words of a monetary Wizard of Oz is not one that is, to borrow a phrase, “built to last.”