We need a new Bretton Woods, 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.