The world is awash in easy money, with consequences that are starting to worry some central bankers and business leaders at the Davos World Economic Forum (WEF), though so far inflation fears seem overdone.
With developed world government finances constrained by huge debts and deficits, central banks have pumped trillions of dollars into the system to try to revive sluggish economies, combat deflation and prop up weak banks, Reuters wrote.
The US Federal Reserve, the Bank of England, the Bank of Japan and to a lesser extent the European Central Bank have strayed far from traditional inflation fighting to take into account objectives such as reducing unemployment, raising nominal GDP, and ensuring the smooth functioning of the sovereign bond market.
In pursuit of these goals, they have taken unconventional steps such as keeping interest rates well below the inflation rate, buying government bonds and mortgage-backed securities and providing long-term liquidity to banks at near zero rates.
Indeed, the Japanese central bank is now actively trying to create more inflation because prices are obstinately stagnant.
The BoJ announced this week its most radical effort yet to end years of economic stagnation, after weeks of relentless pressure from new Prime Minister Shinzo Abe for a greater push to lift the economy out of recession.
In a joint statement with the government, the BoJ said it would switch to an open-ended commitment to buying assets next year and double its inflation target to 2 percent.
Central banking purists, especially in Germany, with its history scarred by hyper-inflation, worry that the guardians of sound money are losing their independence to governments and will find it hard to get the genie back into the bottle.
The leading hawk on the ECB’s Governing Council, German Bundesbank chief Jens Weidmann, who canceled his appearance at Davos, warned that central banks were being bullied by governments and it could lead to currency wars.
Already alarming violations can be observed, for example in Hungary or Japan, where the new government is interfering massively in the business of the central bank with pressure for a more aggressive monetary policy and threatening an end to central bank autonomy, he said in a speech in Frankfurt.
A consequence, whether intentional or unintentional, could moreover be an increased politicization of exchange rates.
Within the Federal Reserve, dissident Richmond Fed President Jeffrey Lacker has been warning for months that the US central bank’s stimulus actions risk a surge in inflation after this year.
Management consultancy Bain & Co. said in a report that the most immediate effect of a world awash with capital has been to paralyze, confuse and distort investment decisions.
Large financial flows were creating dangerous pockets of excess capital in some places, while simultaneously cutting off access in other places. At the same time, big institutional investors like pension funds face large gaps between the returns they will need to meet payouts and what markets will generate.
Capital superabundance will increase the frequency, intensity, size and longevity of asset bubbles, it said, pointing to big risks for economies and businesses closely linked to commodities.
The US central bank embarked on a third round of asset purchases in December that are meant to spur growth and pledged to keep rates near zero until the unemployment rate drops to 6.5 percent, as long as inflation expectations remain in check.
US unemployment was 7.8 percent last month, and Fed Chairman Ben Bernanke made clear last week he is in no rush to tighten monetary policy.
Speaking on Jan. 14 in Ann Arbor, Michigan, he said the worst thing the Fed could do would be to raise interest rates prematurely.
A survey of 1,000 business leaders and academics conducted by the WEF ahead of the Davos meeting found they continue to fear a possible “systemic financial failure”, largely due to unsustainable government finances.
Will the massive quantitative easing undertaken by key central banks to stave off deflation inevitably lead to destabilizing hyper-inflation? the WEF’s annual Global Risks survey asked, noting that some of the current extraordinary monetary policies were essentially experimental.
In a sign of the times, one Davos panel discussion was billed as “No growth, easy money--the new norm?”
Ultra-low interest rates and printing money have combined to fuel a race for weakness among currencies. This raises the risk of a mispricing of assets in the developed world, and of capital controls and trade protectionism in emerging economies.
Tied by its own rules and German resistance, the European Central Bank cannot join the downward currency race, raising the risk that an overvalued euro chokes off any economic recovery.
The outgoing chairman of eurozone finance ministers, Jean-Claude Juncker, voiced alarm this month that the euro’s exchange rate was dangerously high.
The euro has gained 10 percent against the dollar and more than 20 percent against the yen since ECB President Mario Draghi vowed last July to do whatever it takes within the bank’s mandate to preserve the single currency.
Bank of England governor Mervyn King acknowledged last week the danger of asset-price bubbles and mispricing of risk by investors due to central banks’ easy money policies.
“One of the things we want to be a bit concerned about is that interest rates have been so low for so long that some of the actions have reduced risk premia to levels where the search for yield appears to be beginning again,” King said in testimony to a British House of Commons committee.
This is occurring at a time when the economy is operating well below full capacity, the banking system is stretched and central bankers are struggling to find instruments to ensure an economic recovery, he said.
Easy money policies by major central banks such as the Fed, the BoE and the BoJ have strengthened the currencies of developing countries, hurting those countries’ exporters. That in turn has prompted some emerging nations’ governments or central banks to ease their own polices in response.
Philadelphia Federal Reserve Bank President Charles Plosser, a long-time critic of the Fed’s easy money policies, warned this month that central banks in many countries are adopting policies, often under pressure from governments, to control their currencies, calling it an unhealthy phenomenon.
Spanish Jobless Rate Hits Record
Spanish unemployment rose to a record in the final quarter of 2012, as Prime Minister Mariano Rajoy’s government imposed the deepest budget cuts in the country’s democratic history.
The number of jobless approached 6 million people, or 26.02 percent, from 25.01 percent in the previous three months, the National Statistics Institute in Madrid said.
That matched the median forecast of 10 economists surveyed by Bloomberg. Spain is now home to a third of the eurozone’s unemployed.
The jobless number rose as Rajoy marked his first anniversary in office. It is now the highest since at least 1976, the year after dictator Francisco Franco’s death heralded Spain’s transition to democracy.
Some officials predict the slump that hit the eurozone’s fourth-largest economy in 2008 will extend into this year.
“The government expects unemployment to come down in 2013 but it seems too optimistic given not only the weak economic activity we expect but also the usual lag between activity and unemployment,” said Ricardo Santos, a euro-area economist at BNP Paribas SA in London.
This will continue going forward given that the bulk of the cuts in the public sector is yet to be made.
The International Monetary Fund cut its forecast for economic growth in Spain this year, forecasting that gross domestic product will contract 1.5 percent after previously predicting a drop of 1.4 percent.
The Bank of Spain said separately that the recession worsened in the fourth quarter due to budget cuts. The central government and the regions started implementing Rajoy’s fifth package of austerity measures in a year, including higher sales tax and cuts in unemployment benefits, public-sector jobs and wages.
Meeting the European Union deficit target for 2013 will require a very ambitious additional fiscal effort, the Bank of Spain said. The European Commission said this week that Spain will probably miss its 2012 goal of 6.3 percent of GDP, and in 2013 it sees the shortfall at 6 percent.
IMF Lowers Eurozone Expectations
The International Monetary Fund downgraded its October prediction of economic growth in Europe’s single-currency region known as the eurozone.
The IMF said its forecasts were little changed from October, with the global economy expected to climb 3.5 percent in 2013 and 4.1 percent in 2014. Both forecasts were a knockdown from October by 0.1 percentage point, UPI reported.
In the eurozone, economic growth had been forecast for 2013, although it was expected to rise a minimal 0.1 percent. The new prediction calls for a 0.2 percent contraction in the 17-member region.
The 2013 prediction for the United States was lowered from 2.1 percent growth to 2 percent. For 2014, however, the prediction went the other way, climbing 0.1 percentage points from October to 3 percent from 2.9 percent.
Policy actions have lowered acute crisis risk in the euro area and the United States, the IMF said in its World Economic Outlook report.
The report said the US recovery remains broadly on track.
In addition, the report notes that global growth, while slightly less robust than previously predicted, remains on a positive course with growth expected to climb from 3.2 percent in 2012 to 3.5 percent in 2013 and at a rate of 4.1 percent in 2014.
China Manufacturing At Two-Year High
Manufacturing activity in China grew at its fastest pace in two years in January, according to data from HSBC.
The preliminary reading of the Purchasing Managers Index (PMI) was 51.9, compared with 51.5 in December. Levels above 50 indicate expansion.
China’s leaders have taken steps to boost the country’s growth, of which manufacturing is a major component, BBC wrote.
The data is the latest sign that the world’s second-largest economy is recovering after a sharp slowdown.
“Despite the still tepid external demand, the domestic-driven restocking process is likely to add steam to China’s ongoing recovery in the coming months,” said Qu Hongbin, chief China economist at HSBC.
The HSBC preliminary reading, called Flash PMI, is a private survey of more than 420 companies. The responses of 85-90 percent of the companies form the reading.
Japan Posts Record Trade Deficit
Japan has posted a record high trade deficit for 2012, as exports to Europe and China continued their plunge.
The trade gap rose to 6.9 trillion yen ($78 billion; £49 billion) for the full year, the ministry of finance said.
It comes after election promises by Japan’s new Prime Minister Shinzo Abe to boost the economy and recent monetary stimulus by the central bank, WSJ reported.
Analysts said the deficit may have bottomed out, as exports are expected to improve in coming months.
“As exports pick up due to gradual recovery in the global economy, Japan’s trade deficit is likely to shrink in the coming months,” said Tatsushi Shikano, from Mitusbishi UFJ Morgan in Tokyo.
S. Korea Growth Lower
South Korea’s economy expanded lower than analysts forecast in the fourth quarter as gains in the won, Asia’s best performing currency of the past six months, threaten to restrain exports in 2013.
Gross domestic product grew 1.5 percent from a year earlier, unchanged from the expansion in the third quarter, the Bank of Korea said. That compares with the median 1.8 percent estimate of 12 economists surveyed. From a quarter ago, Asia’s fourth-largest economy grew 0.4 percent, NewsNow reported.
South Korea’s export growth may be capped this year, as Japanese Prime Minister Shinzo Abe’s campaign to drive down the yen makes his nation’s products relatively cheaper.
Turkish Banking Outlook Remains Stable
International credit ratings agency Moody’s said on Thursday that the outlook on the Turkish banking system remains stable.
The agency said in a press release that moderate economic growth and improving sovereign financial strength will create supportive operating conditions for banks, despite downside risks from the eurozone crisis, volatile markets and investor risk aversion, TodaysZaman wrote.
Moody’s expects sustained growth in Turkey’s GDP of 3.8 percent in 2013, up from an estimated 3.0 percent in full-year 2012, but below the recent boom prior to the 2009 recession.
Moody’s said it expects net profit margins to weaken over the next 12-18 months, as banks confront an environment of moderating growth, heightened competition and rising provisioning costs.
Commerzbank to Cut Jobs
Germany’s second-biggest bank, Commerzbank AG, says it plan to cut as many as 6,000 jobs over the next three years as it tries to reduce costs.