“Everyman takes the limits of his own field of vision for the limits of the world.”  - Schopenhauer 

The 19^th century philosopher’s quote reflects a symmetric nature. The limits of the world should feedback to limit the possibilities of our actions. Monetary policy is perceived as a panacea for the western world. The recent data and history refutes this predilection. 

Burgeoning public deficits has forced austerity measures across the world. Resultant increase in public discontent precipitates via elections. The displacement of the incumbent party and uprising of the extreme ideologies vindicates the truculence of public. Circumscribed policy makers have turned towards central bankers for solutions. Rising unemployment, declining aggregate demand and languid growth rates are issues in need of critical attention. 

Since the tumultuous days of late 1970s, central bankers have enjoyed two decades of global growth and low unemployment; albeit driven by credit growth. The halcyon days are over post the 2008 meltdown. Interest rates have been cut to the bone balance sheets have been expanded; resulting in negative real long term interest rates.  Yet, the outlook remains parlous for the global economy and financial stability.  

The rise of true multinational corporation has been a key economic development since 1990. These institutions can channelize capital and labor across different economies; at times orthogonal to the monetary policies pursued by local central banks. Cheap credit provided by the Federal Reserve, may precipitate at manufacturing facility in a more competitive labor market economy, such as Latin America or Asia. This serves to explain the sustained growth in top line of certain multinationals while their counterparts catering to local economy have seen precipitous decline in earnings. Hence the private market channel of engendering growth through money supply has been transposed. 

The employment situation appears anemic with unemployment rates still at elevated rates. Empirical evidence suggests that labor and capital shall be deployed only when there is a positive risk adjusted return on investment. The job creation over the last 20 years was primarily fueled by perception of return fueled by leverage. This is transmitted in hiring across the supply chain; from property developers and construction companies to build properties to in leverage finance industry to fuel credit. In a deleveraging world and contracting aggregate demand, the reverse process functions. Without Schumpentarian creative destruction forces and increased leverage; monetary policy will be unable to foster job creation. 

In essence, the “anomalous” decade of sustained global economic growth was not a direct consequence of monetary policy. Light regulation, lower capital requirements, higher leverage, correlated mal-investments all served as necessary ingredients. Central bankers cannot now be called upon to rescue the Titanic; especially when one is not controlling the ship. Policies implemented with misunderstood economic framework could have pernicious effects on the global financial system. If status quo is maintained, future students of history and economics are likely to befit today’s central bankers with Einstein’s definition of insanity.

“No man is an island entire of itself….And therefore never send to know for whom the bell tolls, It tolls for thee.” – John Donne

The seventeenth century poem that inspired Ernest Hemingway towards his seminal piece, stresses the inter-connectivity of human beings. Societies, political states do not thrive when isolated from one another. International cooperation is critical if we were to emerge unscathed from the crisis. 

The global imbalances are apparent, the prodigal west and the parsimonious east. The west needs to increase competitiveness of domestic labor. This is achieved either through currency devaluation or through wage cuts and austerity or a combination of both. Quantitative easing strives to achieve the first. But in a world where every central bank resorts to this measure or peg their currency to US Dollars, this measure fails. A reduction in real wages is well under a state’s control, albeit very unpopular and leads to national resentment. Despite measures for reduction in spending are being contrived, none of them are in practice. The deficits number in Spain came in 2% lower than the target that was revised down by 3%. The persistent increase in debt ceiling and the subsequent failure of the super-committee is an instance in point. 

The creditor countries should seek to modify the investment driven, currency-pegged export driven model to a consumption based society. The structural change is hard to inculcate post the austerity measures put in place by the IMF, post the currency crisis in late 1990s. 

On the topic of IMF, the recent $400 billion in IMF resources is misleading. 82.5% of this is contributed by the European block. The rest of the world is unwilling to bail out Europe, including US and Canada. Pictures of European officials with Champagne and caviar discussing austerity portray the disillusionment prevalent in Europe. The credibility and impartiality of the IMF, with a heavy European influence, are also under scrutiny. Social change in the west is also an integral part of the re-balancing that the world needs. International cooperation and understanding of the situation at hand is critical to address the problem. Process of addressing structural can do without obdurate public, venal bankers and depraved politicians. 

Research carried internally suggests that all of the global growth in the last decade was driven by credit growth. In a world faced with deleveraging and austerity, true technological advancements can alone fuel growth. The alternative case of competitive currency devaluations to increase nominal growth and inflate away debt can have dire consequences. Hopefully scientists, engineers and fundamental value generators will step up to the humanity’s call.