3 months ago I quoted the BIS review:
“What central bank accommodation has done during the recovery is to borrow time – time for balance sheet repair, time for
fiscal consolidation, and time for reforms to restore productivity growth. But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change.
“Alas, central banks cannot do more without compounding the risks they have already created. Instead, they must re-emphasise their traditional focus – albeit expanded to include financial stability – and thereby encourage needed adjustments rather than retard them with near-zero interest rates and purchases of ever larger quantities of government securities. And they must urge authorities to speed up reforms in labour and product markets, reforms that will enhance productivity and encourage employment growth rather than provide the false comfort that it will be easier later.”
BIS, imo, points out there is a political moral hazard problem. Clearly the Tea Party is seeking political advantage afforded by the Fed. The US is by no means unique, this is also true of the game Merkel (and other European leaders) is playing in Europe, true of political reforms being deferred in Japan, and true of the deferred reforms in China.
I think this moral hazard problem and its ultimate cost have been under estimated by the economics profession and the market observers (not to mention the high wire act of tapering or raising rates). The systemic problems of the global economy cannot ultimately be solved by NNGT.
If it can, then I ask the following why doesn't the US government start raising disability payments (I see lawyers advertising they are the best at getting people on disability all the time now on American television) and issuing more debt and having the Fed monetize it - like it is doing now to support the wealthy and banks? Why is monetization limited to supporting the assets of the wealthy? After all demand is weak precisely because of inequality and unemployment. Inequality, is at an all time high and despite 5 years of falling median income in the US - the US worker has not yet reached the productivity adjusted Chinese wage which would lead to full employment. Tyler Cowen's vision will one day come true if nothing is done and the Fed is just deferring action by pursing policies that take the pressure of the elites.
I saw a conference conversation several years ago in which Kyle Bass was asked: What's wrong with kicking the can down the road. Response: What happens when you run out of road?
Are there limits to what the Fed can do? Can the Fed keep rates low and support demand with asset purchases long enough for the economy to stabilize itself? Will political reforms take place while the Fed is kicking the can down the road? Is the economy self correcting.
Mainstream financial and economic opinion seems to believe yes is the answer to all these questions and the Fed actions will be worth the "costs" down the road.
To me the world economy looks like an episode of "Intervention". The Fed is playing the role of codependent parent handing out money to addicted children.
Or perhaps, optimistically, the Fed can keep its balance sheet large indefinitely and we are moving from a global economy addicted to credit to one of addiction management by the Fed.
Like Kid Rock said:
An' this is for the questions that don't have any answers
An' all my heroes in the Methadone Clinic