eBusiness Weekly
Business Writer
A peculiar occurrence is taking place in the global economy. There is no precedent to it. At this moment, six of the largest central banks in the world, namely the US Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, along with the Swiss and Swedish central banks, now hold more than $15 trillion of assets.
These figures were compiled through research done by the Financial Times. The $15 trillion figure is about a fifth of total government debt owed by respective central governments.
This presents challenges for central banks as sooner rather than later, the monetary stimulus of the past decade, characterized mainly by purchase of government bonds and negative interest rates will have to slow down.
Uncertainty is growing in markets as to what will happen of the accumulated debt, and with most governments not having much fiscal space to maneuver, what extent central banks themselves can offer resolution?
From an interest rate perspective, prolonged low interest rates pose the threat of reversing the conventional purpose of lowering interest rates in the first place.
Low interest rates were initially meant to be stimulus by availing cash to encourage aggressive market investment as traditional saving wouldn’t yield much return.
Market participants were supposed to be motivated to borrow more, utilizing those borrowings into vibrant investments that would further growth.
Unfortunately, low interest rates were not accompanied by structural reforms that would enable such subsequent growth opportunities. So while lending may have increased, investment was not as potent in spurring growth.
Moreover, prolonged low interest rates have brewed pessimistic sentiment from saving demographics such as pensioners and retirees in advanced economies. Indeed as the pendulum swings, if any productivity were to result from stimulus, it should ideally be rewarded in safety and return of the earnings made.
Thus, higher interest rates become due. More importantly, low interest rates have not proven overwhelmingly profitable for banks themselves. So, by all measures, it is high time central banks realize that monetary stimulus has not worked to any sustainable better outcome.
The question then is posed; where does the purchase of government bonds and availing of easy cash end? This is the difficulty which large central banks will have to answer in months to come. As market are concerned that without real economic growth, what will happen to all that accumulated debt now? We can draw some parity to what is currently taking place in Zimbabwe, as at some point we risk running into similar dead end uncertainty.
Acknowledging the nuance that monetary stimulus in developed economies was two pronged, as it aimed to avail cash to both government and private sector, in Zimbabwe, we are pursuing a single prong approach by focusing on availing cash to government. But, all fundamentals considered, monetary stimulus pursued by big central banks utilized the same mechanisms as credit financing and debt monetization in Zimbabwe. In our case, debt monetization is when government borrowing turns into money creation, particularly in Zimbabwe through digital platforms. Credit financing could be central bank buying up government bonds, or simply just extending credit facilities. The notable exception in Zimbabwe is that money creation is also taking part through private banks purchasing Treasury Bonds. Underlying all monetary guidance though is the same conviction that availing cash is a remedial solution to stunted economic growth. This is incorrect.
If we are wise, we’d be aware that big central banks have given us ten years worth of hypothesis that proves the insufficiency of this conviction. It is not easy cash to government or private sector that will realize real potent growth.
Monetary policy has its limits! If those limits are superseded, as per big central banks, then only risk and uncertainty will remain over time as there is today. Since the global financial recession, the notion that monetary expansion is the way out of trouble seems an irresistible temptation and short sighted gratuity has appeased it so.
Oddly, governments and central banks moved away from traditional discipline. The primary goal of central banks is to maintain price stability, often interpreted as low inflation. Thus, central banks, including the RBZ must remain cognizant that monetary expansion is not the resolution. In fact, it poses potential outcomes of unsustainable debt that should be averted. There is actually a school of thought that suggests monetary expansion should be “earned” within an economy.
Rather than being perceived as stimulus, monetary expansion should be an occurrence driven by greater productivity. Central banks must be pushed to pursue money creation only because greater goods and services are being produced and there is a need for money creation to complement that output. This is normatively how monetary policy should be.
Governments cannot depend on central banks to fund their operations as much as it may seem conducive in the near term. Ultimately, government debt has to be paid for by the taxpayer if it fails to find potency in creating growth. Monetary policy has given rise to the illusion that there is no taxpayer consequence to what seems to be short term solutions. What the Government of Zimbabwe and the RBZ can learn from big central banks in developed economies post financial recession, is that credit financing and debt monetization is a short term remedy.
Ultimately, without structural reforms that are potent to workforce welfare, it is the workforce itself that risks entering the recession spiral all over again.
