Jim Walker, founder and chief economist at Asianomics Group, said across most of the world, central bankers are keeping interest rates low to induce inflation, which is refusing to rise.
“…[Y]ou would have theoretically expected a boom,” he said, speaking at a forum organized by Asia Securities in Colombo.
“But in the last 10 years, we’ve generated less inflation than we’ve had with double digit interest rates.”
“I don’t know of any central banker looking at the performance over the course of the last decade who would say ‘We’ve made a real mess of this’.”
“I see plenty of them patting each other in the back every year and saying ‘Oh, see what a good job we’ve done saving the system. Let’s go out and try this even more’.”
In the US, up to 2.3 trillion US dollars ‘helicopter dropped’ in to the US credit system by then Fed Chief Bernanke, ended up back in the Fed as the busted credit system failed to transmit the money into the real economy.
However money flowed into developing countries with better credit systems, such as Hong Kong causing property prices to rocket and emerging economies with junk ratings to borrow enthusiastically.
Classical economists have pointed out that Alan Greenspan, egged on by Bernanke had fired mother of all liquidity bubbles following a ‘false inflation scare’ which ended in the Great Recession.
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“In November 2002 then governor Bernanke and then chairman Alan Greenspan misdiagnosed a benign cyclical dip in the price level,” explained economist Steve Hanke.
“Fearing deflation, the Fed panicked, and by July 2003 pushed the Fed funds rate down to a then record low of 1%, where it stayed for a year, allowing a flood of liquidity to hit the economy and the housing bubble to inflate.”
The Great Depression also came after the so-called ‘roaring 20s’ bubble fired by the Fed.
Critics had blamed the policies and open market operations of the then New York Fed Governor, Benjamin Strong for the bubble, in particular a rate cut from 4.0 to 3.5 in 1927 and injecting liquidity by doubling Treasuries holdings at reserves banks to 600,000 dollars to inject liquidity.
Walker said central bankers are suffocating the global economy, which is leading to political ramifications.
The next global crisis would be political, due to a snowballing of poor policies, he said.
“What they are doing is suffocating the global economy and potentially causing massive political disruption and backlash against the ruling elite.”
“That has actually happened all around the world.”
Even as he was speaking, people were out in the streets in Lebanon as the country’s currency collapsed. Lebannon’s debt which was downgraded to ‘CCC’ earlier from ‘B-‘, has just been downgraded to ‘CC’ by Fitch.
In Chile the currency has been collapsing since last year and people are also in the streets.
Sri Lanka is suffering an output shock and higher inflation after the currency collapsed last year.
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Meanwhile the new government has cut income taxes, and also sales taxes, to ‘stimulate’ the economy.
Walker, on his first trip to Sri Lanka, said although he does not have much familiarity with the country, what he saw briefly had troubled him.
Globally, central bankers are causing institutional theft as well, since people are being robbed of their rightful interest on savings, Walker said.
Walker’s comments came after Sri Lanka’s central bank slapped controls on bank deposits, using the powers given to it by US a official who set it up in 1951, when the ‘New Dealer’ brand of Keynesian interventionism was riding high.
Low interest rates also allow unproductive, zombie companies to continue to borrow and stay in business, instead of going bankrupt and closing down, Walker said.
Central banking has interfered with the creative destruction which has led to innovative growth of economies in the past, by not allowing for the destruction of zombie companies, Walker said.
Poor monetary policy has “…allowed these companies to exist, which in turn cause more problems for the economies,” he said.
In Sri Lanka too, central bankers have placed a cap on lending rates, citing them as too high for businesses to borrow at.
Sri Lanka’s central bank has busted the rupee from 4.70 to 182 to the US dollars since its creation, in the worst performance among South Asian central banks.
The central bank has systematically busted the Sri Lanka rupee by not allowing domestic interest rates too shoot up, in a bias against high rates.
Speculators use the low interest rates to undermine a so-called flexible exchange rate regime operated by the central bank.
Senior central bankers have also shown that they have not been aware of the activities of their domestic operations department, which in the past has repeatedly not allowed overnight rates to move up.
However, no official has yet to admit that they have made ‘a real mess’.
Walker said economists are bad at learning from their mistakes. (Colombo/Dec13/2019)