Since the financial crisis, central banks have been engaged in unconventional methods of monetary policy.
And these methods, which include taking interest rates to zero — or lower — and buying trillions of dollars worth of assets, have gotten a lot of people nervous about the future of the world economy.
Writing in Project Syndicate, NYU professor Nouriel Roubini says that the doomsayers and worrywarts of these policies are merely “pseudo economists and market hacks” that have “barely any knowledge of basic economics.”
“This assortment of ‘Austrian’ economists, radical monetarists, gold bugs, and Bitcoin fanatics has repeatedly warned that such a massive increase in global liquidity would lead to hyperinflation, the US dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital krypto-currency counterparts,” Roubini writes.
Yet these views have still shaped public debate on the matter, and so Roubini feels compelled to explain just what these folks got wrong.
For starters, there remains an output gap in most of the advanced world, giving firms limited pricing power. There is also broad labour market slack, with too many workers chasing too few jobs. (Roubini is talking about the developed world economy, not just the US, which has seen slack come down considerably in the last year.)
There is also slack in real estate markets that are still recovering from burst bubbles, while the slowdown in China has caused a glut of manufactured and industrial goods, leading to deflationary pressures globally.
Giving a broad view of what central bank critics have gotten wrong, Roubini writes:
Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.
The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. This, however, is a zero-sum game that merely exports deflation and recession to other economies.
Perhaps more important has been a profound mismatch with fiscal policy. To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies.
And so for Roubini, without meaningful fiscal programs — for example, those that increase infrastructure investment — unconventional monetary policy will remain a major feature of the global economy. But this also doesn’t mean the world is doomed.