RBA governor Glenn Stevens just joined the chorus of central bankers and supra-national bodies calling for governments to do more to support their own economies and reduce reliance on monetary policy alone.
At the Credit Suisse Global Markets Macro Conference in New York overnight, Stevens said monetary policy had certainly worked in the aftermath of the financial crisis in restoring growth and “heading off a catastrophe” but added central bank policy “was always going to have limited capacity to accelerate the recovery”.
That’s an interesting comment when his peers at the ECB, Bank of Japan, and other central banks are still trying to pump prime their economies through an increasingly unconventional and academic approach to monetary policy. Negative rates in these jurisdictions appear as yet to be as ineffective at accelerating the economic recovery and increasing inflation in these jurisdictions as the policies that went before them.
Stevens said traditional monetary policy at the limits of efficacy at a time when policy makers still want more growth and inflation remains low has lead to discussion of “helicopter money” – that’s effectively where “unrequited transfers (gifts) to individuals’ bank accounts by the central bank,” he said.
But just like the Fed’s currently policy dilemma in trying to wean the economy and markets off low rates without blowing financial markets, Stevens said “the main complication is surely that it would be a lot easier to start doing helicopter money than to stop.”
That’s kind of a drug dealer reference don’t you think?
Stevens is saying that once on the drug of free cash, it will be incredibly hard to get the economy off it. Taboos to direct government financing by central banks of their governments exist for a reason, he said.
“Desperate times call for desperate measures, perhaps. Are we that desperate?” he asked.
Rather, Stevens said governments need to break their austerity mindset and start spending again. He said that infrastructure projects are the vehicle to growth and that “through conventional fiscal operations at current bond rates, offer returns comfortably above their cost of funding”.
As a result “helicopter money is not needed,” he said.
Yet the very discussion of helicopter money reinforces the point that, “while people find global growth outcomes still a bit disappointing, we are reaching the limits of monetary policy in boosting it”.
Centrals banks should do what they can but “diminishing returns are setting in” and markets know that.
But then Stevens posed a question to his audience on what is the true outlook for growth. It was posed in an international context but it could have easily been slotted into one of his speeches here at home with regard to the local economic outlook.
“So in the end we will collectively have to face up to the question of whether trend growth is lower and, if so, what is to be done about that,” he said.
But that has implications for markets, for governments and for populations:
If trend growth is lower and we can’t or don’t want to do anything about that, then expectations about future incomes, tax bases and so on will have to be reconfigured. People will need some explanation of why we have to accept that outcome. It may be that this reconfiguration is, in fact, what is happening. That would help to explain why ultra-low interest rates are not, apparently, as successful in boosting growth in demand as might have been expected. The future income against which people would borrow looks lower than it did, not to mention that the current income against which some already had borrowed has turned out to be lower than assumed.
But Stevens said governments can put in place policies which can help address these issues.
In the meantime, “our inability, so far, durably to lift growth prospects is arguably the biggest vulnerability the global financial system faces today”.