Here we go, or should we say it’s time to open our eyes to where we have been going for some time. The unelected heads of the world’s central banks now explicitly control our economic fates. But as I mentioned in a previous post, they have little experience or power to influence politics and so central bankers risk serious political fallout from their currency machinations. In the meantime, anyone holding dollars, or yen, or euros, or renminbi, or promises to be paid in any such paper, can watch the real value of their wealth slowly dissipate. This should have wonderful consequences.
From the WSJ:
‘Loose Talk’ and Loose Money
The G-20 concedes that central banks rule the world economy.
The main message out of the Group of 20 nations meeting in Moscow on the weekend boils down to this: Countries can continue to devalue their currencies so long as they don’t explicitly say they want to devalue their currencies. Markets got the message and promptly sold off the yen on Monday in anticipation of further monetary easing by the Bank of Japan.
This contradiction between economic word and deed shows the degree to which policy makers have defaulted to easy money as the engine of growth. The rest is commentary.
The days before the Moscow meeting were dominated by blustery fears about the “currency war” consequences of money printing in the service of devaluation. Lael Brainard, the U.S. Treasury under secretary for international affairs, gave a speech in Moscow warning against “loose talk about currencies.” She seemed to have in mind Japan, whose new prime minister Shinzo Abe has made a weaker yen the explicit centerpiece of his economic policy.
In the diplomatic event, all of that angst went by the wayside. The G-20 communique bowed toward a vow to “refrain from competitive devaluation.” But the text also repeated its familiar promise “to move more rapidly toward more market-determined exchange rate systems”—words that essentially mean a hands-off policy on currency values. So Japan can do what it wants on the yen as long as it doesn’t cop to it publicly.
That message was also underscored by Federal Reserve Chairman Ben Bernanke, who implicitly endorsed Japan’s monetary easing and declared that the U.S. would continue to use “domestic policy tools to advance domestic objectives.” When the chief central banker of the world’s reserve currency nation announces that he is practicing monetary nationalism, it’s hard to blame anyone else for doing the same.
The upshot is that this period of extraordinary monetary easing will continue. Economist Ed Hyman of the ISI Group counts dozens of actions in recent months in what he calls a “huge global easing cycle.” The political pressure will now build on the European Central Bank to ease in turn to weaken the euro. South Korea and other countries that are on the receiving end of “hot money” inflows may feel obliged to ease as well to prevent their currencies from rising or to experiment with exchange controls.
This default to monetary policy reflects the overall failure of most of the world’s leading economies to pass fiscal and other pro-growth reforms. Japan refuses to join the trans-Pacific trade talks that might make its domestic economy more competitive. The U.S. has imposed a huge tax increase and won’t address its fiscal excesses or uncompetitive corporate tax regime. Europe—well, suffice it to say that Silvio Berlusconi is again playing a role in Italian politics and the Socialists are trying to resurrect the ghost of early Mitterrand in France.
So the central bankers are running the world economy, with the encouragement of politicians who are happy to see stock markets and other asset prices continue to rise. Here and there someone will point out the danger of asset bubbles if this continues—ECB President Mario Draghi did it on Monday—but no one wants to be the first to take away the punchbowl. It’s still every central bank, and every currency, for itself.
Prof. John H. Cochrane, writing in the Jan. 25 issue of the Hoover Digest:
Momentous changes are under way in what central banks are and what they do. We’re accustomed to thinking that central banks’ main task is to guide the economy by setting interest rates. Their main tools used to be “open market” operations, that is, purchasing short-term Treasury debt, and short-term lending to banks.
Since the 2008 financial crisis, however, the Federal Reserve . . . has crossed a bright line. Open-market operations do not have direct fiscal consequences, or directly allocate credit. That was the price of the Fed’s independence, allowing it to do one thing—conduct monetary policy—without short-term political pressure. But an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials.
In addition, the Fed is now a gargantuan financial regulator. Its inspectors examine too-big-to-fail banks, come up with creative “stress tests” for them to pass, and haggle over thousands of pages of regulation. When we imagine the Fed of ten years from now, we’re likely to think first of a financial czar, with monetary policy the agency’s boring backwater.