We need a new Bret­ton Woods, by Da­ni­el Schä­fer.

Handelsblatt Global Edition Magazine - - Table Of Contents - BY DA­NI­EL SCHÄ­FER

Cen­tral banks ha­ve ma­neu­ve­r­ed the glo­bal eco­no­my in­to a de­ad end. It’s ti­me for a new so­lu­ti­on.

When the he­ad of the Bank of Ja­pan, Ha­r­u­hi­ko Ku­ro­da, an­noun­ced ne­ga­ti­ve in­te­rest ra­tes at the end of Ja­nu­a­ry, he pres­ump­tuous­ly cal­led the pro­gram“the most power­ful mo­ne­ta­ry po­li­cy frame­work in the his­to­ry of mo­dern cen­tral ban­king.”

But a me­re two weeks la­ter, Mr. Ku­ro­da’s wea­pon had al­re­a­dy back­fi­red. The Ja­pa­ne­se cur­ren­cy was gai­ning, sha­re pri­ces we­re fal­ling and in­ves­tors in go­vern­ment bonds we­re fle­eing.

The Ja­pa­ne­se blow­back is re­pre­sen­ta­ti­ve of the mas­si­ve pro­blems fa­c­ing Wes­tern cen­tral banks. The im­pact of their po­li­cies isn’t in­cre­a­sing with every new round of mo­ne­ta­ry ea­sing, but de­cre­a­sing.

The cen­tral bank’s po­li­cies, from ne­ga­ti­ve in­te­rest ra­tes to bond purcha­ses worth tril­li­ons of dol­lars, yen and eu­ros, has lan­ded them at a de­ad end. For proof, look no fur­ther than the world’s vo­la­ti­le stock mar­kets, whe­re $7 tril­li­on in va­lue has be­en era­sed sin­ce the be­gin­ning of the ye­ar. Look al­so at the ge­ne­ral flight to sa­fe­ty by the world’s in­ves­tors. It’s lea­ding to an ab­surd si­tua­ti­on that even fi­nan­ci­al ex­perts find dif­fi­cult to com­pre­hend: Go­vern­ment bonds worth a to­tal of $7 tril­li­on — a third of the glo­bal to­tal — are now tra­ding at ne­ga­ti­ve in­te­rest ra­tes. In­ves­tors are pay­ing for what they con­sider a sa­fe ha­ven.

But one thing abo­ve all il­lus­tra­tes the de­ad end in which cen­tral banks find them­sel­ves to­day. Eight ye­ars af­ter the peak of the fi­nan­ci­al cri­sis, the world still hasn’t found a path to sustainable growth. The fe­ars of a glo­bal re­ces­si­on are gro­wing. Even in the Uni­ted Sta­tes, the pri­me ex­amp­le of suc­cess­ful mo­ne­ta­ry loo­se­ning, the eco­no­my is vi­si­bly fal­te­ring af­ter se­veral ye­ars of cre­dit-dri­ven growth.

Two cur­rent flash points ma­ke it ob­vious how cen­tral banks ha­ve ma­de pro­blems worse. The first is in the ener­gy sec­tor.

With the help of le­ver­a­ged debt ma­de pos­si­ble by ul­tra-low in­te­rest ra­tes, U.S. ener­gy com­pa­nies ha­ve li­te­r­al­ly built a bu­si­ness mo­del on shif­ting sands — the ex­pen­si­ve extrac­tion of sha­le oil and ot­her “un­con­ven­tio­nal” fu­els. Col­lap­sing oil pri­ces are now pro­du­cing a wa­ve of bankrupt­cies.

The se­cond flash po­int is in the emer­ging eco­no­mies. The­re, the West has ex­por­ted its own pro­blems via a loo­se mo­ney po­li­cy that has floo­ded emer­ging mar­kets with cheap debt — and over­in­deb­ted­ness. The he­ad of In­dia’s cen­tral bank, Raghur­am Ra­jan, has be­en con­dem­ning this de­plo­r­able sta­te of af­fairs for a long ti­me.

Con­se­quent­ly, the cen­tral banks ha­ve be­en at the he­art of a sick­ness sprea­ding for ye­ars th­rough both the West and the East — the sick­ness of ex­ces­si­ve debt

This ad­dic­tion to debt is the root of all evil. It is the rea­son for our worries about growth and for a si­tua­ti­on in which in­ves­tors are con­cer­ned about the credit­wort­hi­ness of com­pa­nies and coun­tries de­spi­te re­cord low in­te­rest ra­tes.

The Eu­ro­pean Cen­tral Bank won’t sol­ve the­se pro­blems by buy­ing go­vern­ment bonds at an even fas­ter pace, or by lo­wer­ing in­te­rest ra­tes even de­eper in­to ne­ga­ti­ve ter­ri­to­ry. Si­mi­lar­ly, the U.S. Fe­deral Re­ser­ve get­ting cold feet again and backing away from ano­ther mi­nu­s­cu­le ra­te in­crea­se would, at best, trig­ger a flash in the pan. And the sug­ges­ti­on co­m­ing from so­me of our Anglo-Sa­xon fri­ends that cen­tral banks should now de­po­sit mo­ney di­rect­ly in­to their ci­ti­zens’ pri­va­te ac­counts seems down­right lu­di­crous.

The world’s main cen­tral banks ha­ve run out of ide­as. They are now cau­sing the op­po­si­te of what their ul­tra-loo­se mo­ne­ta­ry po­li­cy had in­ten­ded. Ins­tead of con­fi­dence and a grea­ter wil­ling­ness to ta­ke risks, they are so­wing di­s­trust and a flight to sa­fe ha­vens. Sol­ving the glo­be’s debt pro­blems is bey­ond their in­di­vi­du­al powers. They ha­ve un­leas­hed a con­test of mo­ne­ta­ry ea­sing on­to un­cer­tain mar­kets.

It is ti­me for a glo­bal de­ba­te at the hig­hest le­vels about the glo­bal debt pro­blem and the crea­ti­on of a new fi­nan­ci­al ar­chi­tec­tu­re.

What we need is a new Bret­ton Woods Con­fe­rence. The ori­gi­nal ef­fort in 1944 to re­gu­la­te the in­ter­na­tio­nal fi­nan­ci­al or­der took place un­der ve­ry dif­fe­rent cir­cum­stan­ces at the clo­se of World War II. But si­mi­lar ne­go­tia­ti­ons would ta­ke place in the sa­me spi­rit to­day, na­me­ly with the go­al of en­ding eco­no­mic na­tio­na­lism. The right ve­nue would be the Group of 20 lea­ding in­dus­tri­al na­ti­ons.

Oli­vier Blan­chard, the for­mer chief eco­no­mist of a Bret­ton Woods pro­duct known as the In­ter­na­tio­nal Mo­ne­ta­ry Fund, on­ce said that “in­ter­na­tio­nal po­li­cy co­or­di­na­ti­on is li­ke the Loch Ness mons­ter — much dis­cus­sed but ra­re­ly se­en.”

But oc­ca­sio­nal­ly the mons­ter does sur­face.

Da­ni­el Schä­fer is Han­dels­blatt‘s fi­nan­ce edi­tor and co­vers the Eu­ro­pean Cen­tral Bank.

Bri­tish eco­no­mist John May­nard Keynes (cen­ter) talks to de­le­ga­tes at the Bret­ton Woods con­fe­rence in 1944.

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