Tuesday, May 8, 2012


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

The 19th 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 comments:

Post a Comment