Money Cannot Buy Growth
Since Alan Greenspan became the Fed chairman in 1987, there has been a policy consensus on the primary role and effectiveness of monetary policy in cushioning an economic downturn and kicking it back to growth. Fiscal policy, due to the political difficulties in making meaningful changes, was relegated to a minor role in economic management. Structural reforms have been talked about, but not taken seriously as a tool in reviving growth.
In the four years after the global financial crisis that began in the summer of 2008, the United States' monetary base more than tripled and China's M2 has doubled. This is the greatest experiment in monetary stimulus in modern economic history.
Staving off crisis and reviving growth still dominate today's conversation. The prima facie evidence is that the experiment has failed. The dominant voice in policy discussions is advocating more of the same. When a medicine isn't working, it could be the wrong one or the dosage isn't sufficient. The world is trying the latter. But, if the medicine is really wrong, more and more of the same will kill the patient one day.
When the crisis began, I predicted how central banks and governments would react: they would ease monetary policy and increase fiscal deficits, the medicines wouldn't work, they would increase the dosage and the end game is worldwide stagflation. I argued in favor of monetary and fiscal stimulus to the extent to stabilize the situation, not to revive growth. The latter needed structural reforms to be achieved.
Structural reforms are difficult because they would upset a lot of people and are slow in producing results. Smart and powerful people usually want to produce quick results to show their worth. This is why policy actions often take the path of least resistance, even if they lead the world to the edge of the cliff.
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