I spent the past weekend in Istanbul at the seminar jamboree that precedes the IMF-World Bank Annual Meetings. Ministers of finance, central bankers, government officials and international civil servants all agreed on one thing: there would be no premature exit from quantitative easing, credit easing and other unconventional expansionary monetary policy measures such as the ECB’s enhanced credit support.
All those in a position of authority subscribed to the view that there was a major asymmetry between the risk of exiting too late and exiting too early: exiting too late would only cause minor overheating problems that could easily be corrected. Exiting too soon would cause irreversible damage, because after a too early exit, policy could not be re-activated again.
Nobody explained the analytics or empirics to support that view. It simply became an accepted truth. In the world of mathematics and formal logic, there are two modes of proof: deduction and induction. In economics, as in the other social sciences, we have three modes of proof: proof by induction, proof by deduction and proof by repeated assertion.
Be that as it may, the world is being flooded with official liquidity by the leading central banks of the overdeveloped world. Because of the depressed state of the real economy in most advanced industrial countries (large negative output gaps whose magnitude continues to grow, high and rising unemployment rates), this official liquidity flood is unlikely to generate an overall (private plus public) liquidity flood in the overdeveloped world. Commercial banks either hoard the newly injected central bank liquidity at the central bank in the form of deposits or use it to purchase safe liquid assets, such as the sovereign debt instruments of reasonably solvent nation states. This has the further advantage of keeping the regulators happy, even if it does not do much for would-be private borrowers from the zombified banking system.
Broad monetary aggregates are growing little if at all in the overdeveloped world and credit growth to the non-financial enterprise sector and to the household sector remains minuscule. We are therefore unlikely to see a credit boom or asset market frenzy any time soon in the advanced industrial countries, let alone any pick-up in domestically generated inflation for indices like the CPI. The massive injection of official liquidity by the Fed, the ECB, the Bank of England, the Bank of Japan and other central banks in the north-Atlantic region is much more likely to show up as credit and asset market booms, bubbles and – eventually – busts in those emerging markets that are growing rapidly again, that is, most emerging markets other than those in Central and Eastern Europe. China, Brazil, India, Indonesia, Singapore, Turkey and Peru are but some of the countries at risk.