And yet the truth is very different. They have. They will discuss lots of new ideas, from dropping money from the sky to re-basing currencies. But none of them are likely to work. Very soon it might be better to admit that.
If you went into 2016 thinking central banks had done everything they could do keep prices rising and growth moving forward, the year so far has proved you wrong.
First of all, the Bank of Japan joined European central banks, including Sweden and Switzerland as well as the European Central Bank, in imposing negative interest rates. Soon afterwards, ECB President Mario Draghi rolled out yet another “big bazooka,” taking the main rate down to zero, imposing deeper negative rates elsewhere, and increasing the monthly rate of quantitative easing.
Are they finished yet? Heck no. You or I might think they had thrown everything they could at the problem, but as it turns out we’d be wrong. Soon afterwards, the ECB’s chief economist Peter Praet gave a widely publicized interview in which he said there could well be more interest-rate cuts down the line, and possibly “helicopter money” as well.
Every other central bank has been keen to push the same message, and a range of academic economists have started popping up with ever more bizarre suggestions about how policy makers could stimulate their economies even further.
Of course, you can see what they are up to. No one ever wants to admit they are out of options. They have to keep up the pretence that there is something more than they can do. But that doesn’t mean they are right. You only have to pause and look at how weird and bizarre some of the suggestions are to realize how hollow they actually are.
Negative interest rates have now been imposed on roughly a third of the global economy, but if anyone out there thinks they are great success they are keeping themselves well hidden.
So far they seem to have backfired. They have destroyed the profitability of the banks — so much so in Europe that there were even fears about the stability of the mighty Deutsche Bank earlier this year. It is hard to understand how you can have a healthy economy without a healthy banking system.
Worse, no one thinks you can keep cutting into negative territory. A minus 5% rate on bank deposits? A minus 10% negative rate? Surely everyone can see that people will just use cash instead, or gold bars, or bitcoins — any sort of money that doesn’t lose value just by holding it.
Next up, “helicopter money” is getting a lot of discussion. The economist Milton Friedman famously put forward the idea that central banks could literally drop money into the economy, as if they were throwing it from a helicopter. But how is it actually meant to work in practice?
Take Europe for example, since Praet is actively discussing the possibility. Would the ECB simply deposit, say, 1,000 euros in everyone’s bank account? What about the people who don’t have bank accounts. According to McKinsey estimates, 8% of people even in high-income countries are unbanked. Since they are the probably the poorest members of society, it seems unfair to them to miss out.
Or will someone go round with a bundle or notes? Worse, how do we know that they will actually spend the money, rather than just pay off debts — which would of course defeat the whole purpose of the exercise. The more you think about the practicalities of the proposal, the less and less serious it seems.
There are even stranger ideas out there. There has been plenty of commentary about the idea of banning cash to make negative rates more effective. But how do you stop people creating an alternative? After all, the reason we still use bank notes is because they are useful. One British economics professor recently floated the idea of re-denominating the currency — that is, the old one would be withdrawn and a new one issued.
Others have flirted with debt cancellation — what you owe would simply be written off. It’s all good fun for people who enjoy that sort of thing. But serious policy? Not really.
It is no good just telling people you have plenty of ammunition left in your arsenal. At a certain point, you actually need to say what it is, and explain how it will work.
And if you can’t? It might be better to say that central banks have done what is possible to stimulate their economies, and that it is now up to governments to do their bit, either with expansionary fiscal policy, or structural reforms, to make their economies more competitive. Sooner or later, they will work that out for themselves anyway — and they won’t thank you for lying to them.