Stimulus addiction may be driving the global economy towards a cliff edge

Name: Poor countries said to be left behind in Covid-19 vaccine race as rich nations get first doses
Uploaded: 2020-12-20T17:30:18.000Z
Duration: 3 min 58 s
Description: Poor countries said to be left behind in Covid-19 vaccine race as rich nations get first doses

Central bankers seem to have little choice other than to offer more stimulus, risking more financial instability later. Debt forgiveness may be the only way out – but therein lie other troubles

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The US Federal Reserve has pledged to keep on buying up massive amounts of debt and to keep interest rates low for the next few years. Photo: Reuters

Anthony Rowley

Published: 1:30am, 21 Dec 2020Updated: 1:49am, 21 Dec 2020

Increasingly, it feels like we are heading over a cliff yet dare not turn back because of the demons pursuing us. This is the stuff of nightmares but also an apt metaphor for the fate that could await a global economy being driven towards disaster by an addiction to monetary and fiscal stimulus.

Financial counsellor and director of the International Monetary Fund’s monetary and capital markets department Tobias Adrian used more nuanced terms to describe the dilemma in a paper he presented to a high-level financial gathering in Washington recently. But the meaning was much the same.

Central banks, he said, have done a good job in preventing a “catastrophic downturn” in the global economy, and more of the same will be needed. But he also cautioned, “it is critical that policymakers weigh the pros of providing more stimulus today against the potential cons of higher financial stability risks down the road.”

It may seem hard to take such warnings seriously, and not just because the pandemic has pushed all thoughts of financial crisis out of most people’s minds. Do we not, after all, live in a world where money flows like milk and honey, and where debt no longer matters?

Is this not a brave new world where interest rates stay “lower for longer” (maybe forever), where authorities are committed to doing “all it takes” to avert economic and financial collapse, and where modern monetary theory teaches that (rich country) governments can go on printing money forever?

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Poor countries said to be left behind in Covid-19 vaccine race as rich nations get first doses

Has not the threat of inflation been banished to the distant future? Is this not a time when stock prices can ignore economic fundamentals (even horrors such as Covid-19) and continue charging bullishly into the future? Have we not discovered the pot of gold at the end of the rainbow?