National Post - Financial Post Magazine
AND NOW THIS
Seven years of low interest rates and higher debt spending has done little to change the economy
Seven years is long enough to know that low interest rates and higher government spending don’t help.
The United States is now seven years into a great economic experiment conducted on three fronts. On Dec. 16, 2008 — shortly after the collapse of Lehman Brothers — U.S. Federal Reserve Chairman Ben Bernanke set the fed funds rate at what he described as “basically zero.” At the same time, the U.S. government launched a deficit-spending regime that a good comedy writer might describe as a plan to drive the U.S. debt to “basically infinity.” In a third unconventional policy action known as quantitative easing, the Fed began buying billions of dollars in government and other securities in a US$4trillion effort to drive down interest rates.
Seven years to the day later, Fed officials will meet again this coming Dec. 16, at which time current Chair Janet Yellen will announce whether the zero interest rate policy experiment — known as ZIRP — will come to an
(%) end. Don’t bet on it. Nor 90 should we expect too much in the way of an anniversary celebration, despite the best efforts of Bernanke to declare victory during his recent triumphal book tour promoting The Courage to Act: A Memoir of a Crisis and its Aftermath. After seven years of
2008 2009 2010 2011 monetary and fiscal experimentation, nothing much has changed. ZIRP has failed to generate the promised growth — except in government debt. Among G-7 nations — including Canada — net government liabilities have soared to 89% of GDP from 46% in 2008. In the U.S. over that time, government debt has risen from US$9 trillion to more than US$18 trillion and is now heading to US$20 trillion following the recent increase in the debt ceiling.
All that alleged stimulus and so little to show for it, and not just in the U.S. From Europe to China, central banks are again dropping rates in an effort to stimulate growth and perk up investment and spending. Some time in December, the European Central Bank is expected to outline a new wave of quantitative easing, including purchases of government debt of Euro nations.
Advocates of new blasts of deficit spending — such as economic luminaries Lawrence Summers and Paul Krugman — roam the landscape. Politicians, including Prime Minister Justin Trudeau, are eager to follow. They cross paths with a steady parade of monetary theorists who have even more schemes to replace the unconventional experiments that have been in place for seven years. If zero interest rates didn’t work, maybe we need a negative interest rate policy (NIRP), such as that tested (with no obvious success) in Sweden and Denmark. Bernanke says he sees merit in NIRP under certain circumstances if ZIRP doesn’t seem to be working. Others say we perhaps need more inflation, cranked up to 4% or higher, to scare up economic activity.
At the International (%) 1 Monetary Fund, the pursuit of more unconventional monetary policy is constant. At a recent IMF conference, a dozen economists examined options. One radical proposal, presented by Adair Turner, former head of the U.K. Financial Services Authority, would have central banks directly finance government debt. In 2012 2013 2014
his new book, Between Debt and the Devil, Turner proposes “breaking the taboo” on direct central-bank funding of government by simply having, say, the Bank of Canada, transfer billions of nominal dollars — sort of like fictional bitcoins — into a government bank account from which Ottawa could then spend to “stimulate aggregate nominal demand.”
Turner, in his IMF paper, says ending the taboo on central bank financing of state debt could be dangerous, but “there are strong reasons for believing that in today’s specific circumstances” the consequences of excluding the option could be “very severe.”
For those of us who are not economists, the economic story lines are getting harder and harder to follow, impossible to believe and increasingly scary. Seven more years, anyone?
AMONG G-7 NATIONS — INCLUDING CANADA — NET GOVERNMENT LIABILITIES HAVE SOARED TO 89% OF GDP FROM 46% IN 2008