ធនាគារកណ្តាលមិនអាចបដិសេធពីផលវិបាកខាងសីលធម៌នៃការរក្សាអត្រាការប្រាក់ទាប

- Low rates encourage asset bubbles, discourage long-term investments, widen the wealth gap and promote excess consumption, hastening climate change. They ultimately exact a moral cost – on the poor and the planet

An activist outside the New York Stock Exchange holds a sign as part of a protest calling for higher taxes on the rich, on January 28. The low-rate environment since 2008 has widened wealth and income inequalities. Photo: EPA-EFE

Top central bankers are meeting virtually in Jackson Hole, Kansas, this weekend to discuss “macroeconomic policy in an uneven economy.” Everyone is eagerly awaiting Jerome Powell’s comments about the US Federal Reserve’s monetary policies in the wake of global and national imbalances.

Central bankers carry the aura of cardinals since they manage money mysteriously through the creation of central bank reserves.

For nearly 25 years, the Fed’s balance sheet was around 6 per cent of national gross domestic product. This had doubled to over 15 per cent of GDP in 2008, and then to 34.6 per cent by the end of June this year. The Bank of Japan (BOJ) is the champion, with assets worth 132 per cent of national GDP, with the People’s Bank of China at 33.9 per cent and European Central Bank (ECB) at 60.6 per cent.

These four central banks account for US$30.1 trillion in assets or 35.5 per cent of world GDP. Since just before the 2008 Lehman collapse, the Fed, BOJ and ECB have increased their combined assets from US$4 trillion to US$24.3 trillion. Their purchases in sovereign debt, corporate bonds, mortgage papers and exchange-traded funds move markets.

Small wonder everyone hangs on the words of central bankers.

Last year, Powell’s Jackson Hole speech laid out the Federal Open Market Committee’s consensus statement. His address was revealing because the words “wealth”, “climate change” and “race” did not appear. “Inequality” appeared once in a footnote.

He mostly lamented that the Fed could not seem to get inflation up to 2 per cent despite tight job markets – a target “most consistent with our mandate to promote both maximum employment and price stability”.

How is it possible that central bankers, who have expanded their balance sheets by US$9 trillion since March 2020, can deny their impact on climate change, low productivity, wealth and income inequality?

Their standard answer is that these are outside their mandate of maintaining price and financial stability. The unspoken fear is that, if they wander outside their mandates, politicians will blame them for everything and remove their hard-won independence.

Here’s why we cannot disentangle monetary policy from climate change, low productivity and social inequality.

First, all markets are based on the price of money, namely the interest rate. We use the discounted cash flow model for valuation by discounting future cash flows from its present value.

The lower the interest rate (and so capital cost), the higher the asset’s value. But when the discount rate is zero or negative, the value becomes infinite or indeterminate, which is why we see bubbly asset markets everywhere.

Second, low interest rates and high liquidity reduce productivity. No investor in his right mind would choose the uncertain long term and invest in say, infrastructure or climate action, because it is so much better to speculate on asset bubbles.

Speculators know that central banks would keep markets stable, ergo underwrite market shocks. Yet too much short-term liquidity creates the trap John Maynard Keynes identified during the 1930s Great Depression.

You are trapped because investors stay liquid, rather than invest in long-term productivity-creating jobs and capital. Few now are allocating capital to deal with climate change, even at very low interest rates.

Third, wealth and income inequalities worsen with lower interest rates. The rich can borrow cheaply because they have collateral, whereas the poor pay much higher interest rates because of higher credit risks. Asset inflation widens wealth inequality.

Could the stock and bonds markets be at record heights, when world growth is negative during the pandemic, without US$9 trillion of monetary and fiscal stimulus?

Fourth, carbon emissions come from excess consumption, which is only possible through debt creation. Ecologists know that if every person on Earth consumes like the average American, we would need four Earths of natural resources.

It so happens that financial assets (mostly debt) are already four times world GDP. We are depleting natural resources by consuming today, leaving our debt to future generations.

But why is there no inflation? The answer is that the bottom half of society (many in developing countries) are so desperate for income that they are selling cheap just to survive. Like in the 1930s, the rich have never had it so good.

The world is now so complex and entangled that we cannot separate climate change, jobs, technology, inflation and politics from financialisation. Central banks in smaller markets recognise the threat – South Korea is the first developed Asian economy to raise its interest rates.

The Fed will not want to raise interest rates in the short term as federal debt cannot tolerate higher interest costs. It will want to keep the low-rate status quo, and if inflation runs higher than 2 per cent, the borrowers get their debt inflated away. Only the poor and the savers pay.

Global imbalances distorted by low interest rates ultimately exact a moral cost – the impact falls not on the 1 per cent but on the poor and the planet. Our cardinals of finance never worry about unemployment because Wall Street offers plenty of jobs.

Andrew Sheng writes on global issues from an Asian perspective

SCMP