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...notando nome e cognome dell'autore mi chiedo se non sia la trama di un nuovo racconto horror...
Central banks risk turning recovery into failure
By Stephen King
Published: March 2 2011 14:06 | Last updated: March 2 2011 14:06
Just imagine that the developed world’s central banks raise interest rates this year. Would this be a welcome sign of success, signalling the beginnings of a sustained economic recovery? Or would it represent the most monumental of policy failures?
Many central bankers are becoming increasingly trigger-happy. The Bank of England is more and more hawkish by the minute. The European Central Bank has an intense dislike of all things inflationary, whatever their source. Even the Federal Reserve is feeling the pressure, continuously being forced to deny that inflation “over there” in the emerging world is the result of printing money “over here” in Washington.
With inflation either already ascending or on the verge of leaving base camp, some central bankers are beginning to think that interest rates must now be nudged higher. Their case is being strengthened by persistent – some might say insistent – increases in oil prices. Yet there is something very peculiar about this latest rise in inflation.
Standard economic upswings end with inflation. This one is beginning with inflation. Central banks typically raise interest rates to prevent inflation from picking up. They’re now thinking of raising interest rates to bring inflation back down. Higher interest rates are typically associated with rapid economic growth. Yet the West’s economic recovery so far has been arthritic, at best.
And there are few, if any, domestic inflationary drivers. Wage growth is modest. Money supply growth is insipid. On any conventional measure, there’s plenty of spare capacity. If interest rates go up, it’s because Western central banks are increasingly worried about the impact of imported price pressures from elsewhere in the world.
These price pressures, reflecting cyclical and structural factors, have mostly preceded the latest bout of anxiety in the oil market.
On the cyclical front, what can best be described as “the unintended consequences of quantitative easing” have played a major role. With many emerging nations addicted to their dollar currency pegs, easy US monetary policy finds its way into every nook and cranny of the global economy. But whereas the US economy itself has been held back by the headwinds of excessive debt, debt-lite emerging economies have taken full advantage, booming like there’s no tomorrow.
On the structural front, the Western world is still struggling to cope with the emerging world’s ever-increasing share of global economic activity. If China, India and other behemoths are to consume more of the world’s scarce raw materials, the West will have to consume less. Real exchange rates will have to adjust. That can happen either through movements in nominal exchange rates – a stronger renminbi, a weaker dollar – or movements in relative prices – higher wages in the emerging world, higher prices (hence, lower real wages) in the West.
Put these cyclical and structural stories together and we end up with a world of rapid growth in which developed nations enjoy, at best, a supporting role.
If Western interest rates now rise in response to inflation, it will surely be a partial admission that earlier stimulus measures did not find their target. Global economic growth was boosted but, for policymakers, only in the “wrong” parts of the world. The emerging nations’ success has, in turn, imposed the equivalent of a tax on Western economies. This “tax” is being paid via an increase in prices relative to wages. Hawkish central bankers would rather the tax be paid via higher interest rates.
Yet raising rates may simply squeeze Western demand without choking off “Eastern” inflation. Unless Western interest rates rise by an implausibly-large amount, monetary conditions will remain supportive in the emerging world and commodity prices will likely remain elevated. Imported inflation will continue to add to Western inflation. If so, domestic inflation will have to be lowered if central bankers are to hit their targets.
In the near-term, this is no easy task. Domestic inflationary drivers tend to be “sticky”. They don’t respond well to changes in interest rates. Indeed, inflation may only be brought to heel in the near-term if interest rates are raised far enough to throw Western economies back into recession.
There is another way. Higher inflation today will automatically generate lower growth tomorrow. In the absence of wage pressures, rising prices will squeeze real incomes, lowering demand and leading to a gradual reduction in domestically-generated inflation. It won’t be instantaneous but, under current circumstances, patience is surely a virtue.
Central bankers, however, are often impatient. They worry about lost credibility without recognising that impetuosity itself can be extraordinarily damaging. If interest rates go up and a Western recession follows thereafter, central bankers will have been the architects of their own monumental failure.
Stephen King is group chief economist at HSBC. He is the author of Losing Control: the Emerging Threats to Western Prosperity
...notando nome e cognome dell'autore mi chiedo se non sia la trama di un nuovo racconto horror...
Central banks risk turning recovery into failure
By Stephen King
Published: March 2 2011 14:06 | Last updated: March 2 2011 14:06
Just imagine that the developed world’s central banks raise interest rates this year. Would this be a welcome sign of success, signalling the beginnings of a sustained economic recovery? Or would it represent the most monumental of policy failures?
Many central bankers are becoming increasingly trigger-happy. The Bank of England is more and more hawkish by the minute. The European Central Bank has an intense dislike of all things inflationary, whatever their source. Even the Federal Reserve is feeling the pressure, continuously being forced to deny that inflation “over there” in the emerging world is the result of printing money “over here” in Washington.
With inflation either already ascending or on the verge of leaving base camp, some central bankers are beginning to think that interest rates must now be nudged higher. Their case is being strengthened by persistent – some might say insistent – increases in oil prices. Yet there is something very peculiar about this latest rise in inflation.
Standard economic upswings end with inflation. This one is beginning with inflation. Central banks typically raise interest rates to prevent inflation from picking up. They’re now thinking of raising interest rates to bring inflation back down. Higher interest rates are typically associated with rapid economic growth. Yet the West’s economic recovery so far has been arthritic, at best.
And there are few, if any, domestic inflationary drivers. Wage growth is modest. Money supply growth is insipid. On any conventional measure, there’s plenty of spare capacity. If interest rates go up, it’s because Western central banks are increasingly worried about the impact of imported price pressures from elsewhere in the world.
These price pressures, reflecting cyclical and structural factors, have mostly preceded the latest bout of anxiety in the oil market.
On the cyclical front, what can best be described as “the unintended consequences of quantitative easing” have played a major role. With many emerging nations addicted to their dollar currency pegs, easy US monetary policy finds its way into every nook and cranny of the global economy. But whereas the US economy itself has been held back by the headwinds of excessive debt, debt-lite emerging economies have taken full advantage, booming like there’s no tomorrow.
On the structural front, the Western world is still struggling to cope with the emerging world’s ever-increasing share of global economic activity. If China, India and other behemoths are to consume more of the world’s scarce raw materials, the West will have to consume less. Real exchange rates will have to adjust. That can happen either through movements in nominal exchange rates – a stronger renminbi, a weaker dollar – or movements in relative prices – higher wages in the emerging world, higher prices (hence, lower real wages) in the West.
Put these cyclical and structural stories together and we end up with a world of rapid growth in which developed nations enjoy, at best, a supporting role.
If Western interest rates now rise in response to inflation, it will surely be a partial admission that earlier stimulus measures did not find their target. Global economic growth was boosted but, for policymakers, only in the “wrong” parts of the world. The emerging nations’ success has, in turn, imposed the equivalent of a tax on Western economies. This “tax” is being paid via an increase in prices relative to wages. Hawkish central bankers would rather the tax be paid via higher interest rates.
Yet raising rates may simply squeeze Western demand without choking off “Eastern” inflation. Unless Western interest rates rise by an implausibly-large amount, monetary conditions will remain supportive in the emerging world and commodity prices will likely remain elevated. Imported inflation will continue to add to Western inflation. If so, domestic inflation will have to be lowered if central bankers are to hit their targets.
In the near-term, this is no easy task. Domestic inflationary drivers tend to be “sticky”. They don’t respond well to changes in interest rates. Indeed, inflation may only be brought to heel in the near-term if interest rates are raised far enough to throw Western economies back into recession.
There is another way. Higher inflation today will automatically generate lower growth tomorrow. In the absence of wage pressures, rising prices will squeeze real incomes, lowering demand and leading to a gradual reduction in domestically-generated inflation. It won’t be instantaneous but, under current circumstances, patience is surely a virtue.
Central bankers, however, are often impatient. They worry about lost credibility without recognising that impetuosity itself can be extraordinarily damaging. If interest rates go up and a Western recession follows thereafter, central bankers will have been the architects of their own monumental failure.
Stephen King is group chief economist at HSBC. He is the author of Losing Control: the Emerging Threats to Western Prosperity
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