How Central Banks’ Easy Solution Could Devastate the Global Economy
Central banks around the world have opened the floodgates with massive levels of quantitative easing in an effort to try to stimulate their respective economies. Turning on the quantitative easing tap is easy; putting the genie back in the bottle will be extremely difficult for central banks globally.
I am not alone in sharing this opinion, as the governor of Denmark’s central bank, Lars Rohde, has voiced similar concerns. In a recent interview, Rohde stated, “The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation… How do we exit this without killing whatever nascent recovery there might be at that time?” (Source: Levring, P. and Schwartzkopff, F., “Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says,” Bloomberg, April 8, 2013.)
While central banks around the world are using quantitative easing in an effort to revive the global economy, the long-term consequences, as I’ve mentioned before, could prove to be extremely costly. I certainly welcome the honesty that Denmark’s central bank’s governor is displaying in voicing his concerns about how all of this quantitative easing might have serious long-term risks.
With Japan just now unveiling a massive new quantitative easing program in addition to the Federal Reserve’s asset purchase program, the floodgates continue to be wide open. However, central banks around the world have embarked on an aggressive quantitative easing policy since the great recession began, yet little has changed in terms of global unemployment.
Many nations around the world still suffer from extremely high levels of unemployment. It appears that quantitative easing did have an impact in certain asset prices, namely stocks and now home prices, but job creation has been stubbornly missing.
My worry is that much of the global economy is propped up by central banks pumping massive levels of quantitative easing into the system, supporting firms that should go under. In a free market system, weak companies go under, and new and stronger companies emerge out of that turmoil. This is creative destruction at its core, and it’s the reason why America has been so strong in the past. But by trying to keep the balloon afloat, central banks are weakening the fundamental strength of the economy.
Propping up weak companies with cheap quantitative easing is not a long-term solution. This is no different than the government creating jobs by hiring people to dig holes and fill them back up. Society does not benefit from such wasted energy.
Yes, some assets have gone up in value, but if quantitative easing were to end today, how much of the global economy would remain strong? I would say very little. Housing and automobile sales are bright spots in America, yet these sectors are clearly pushed up by intervention from central banks.
Everyone wants the easy solution, yet there are no quick fixes for the global economy. The previous bubble ended up bursting, because it was artificial. To clear these excesses, central banks can’t simply pump out quantitative easing and think they can solve the problem in a year or two.
I welcome more critical thinking and concern for the long-term risks by governors of central banks around the world, such as Denmark’s central bank governor. Unfortunately, too many central banks and politicians are focused primarily on the short-term “fix.”
Central banks have the unenviable position of taking up slack from where politicians should be involved, namely making tough, structural reforms. However, no one gets elected by telling the truth and reforming an economy. Politicians get elected by telling people what they want to hear, even if its feasibility is questionable.