For years we have read that it is important for the Federal Reserve and major central banks to push the limits of monetary policy to stimulate growth and jobs. Monetary policy was at the forefront of all stimulus plans. In 2008, quantitative easing seemed huge, but subsequent incremental plans made this stimulus package all but useless.
Since 2008, every new government spending plan had to be bigger. If it wasn’t at least two trillion dollars, it didn’t even make the headlines. As for monetary policy, the limits have been exceeded almost every five years. Negative real and even nominal rates, trillions of new money supply, and various buying programs that included private debt and even, in the case of Japan, exchange-traded funds (ETFs).
Since the start of the pandemic in March 2020 through May 2020, central banks and governments have unveiled more than $15 trillion in stimulus, equivalent to 17% of the global economy, according to Reuters . In just three months. It was called “the monetary bazooka”. However, once the reopening of the economy was fully in place, most of these plans continued. Central banks alone added $9 trillion to their balance sheets to reach a combined size of $24 trillion, according to Bloomberg. This, added to the fiscal response that McKinsey called “the $10 trillion bailout,” pushed the already astronomical figure for the previously mentioned combined fiscal and monetary stimulus to over $20 trillion in just nine month.
The monetary and fiscal bazooka has massively turned against him. It was so important that policymakers are now surprised at the aggressiveness of market reactions to small rate hikes. But that’s normal. The leverage and excesses built into investors’ portfolios and bets are enormous and most market participants are seeing how growth estimates are falling and inflation expectations are soaring. Stagflation is now more than just a distant risk.
The World Bank has made clear the risk of stagflation as global growth is expected to fall from 5.7% in 2021 to 2.9% in 2022, a figure well below the 4.1% the bank had forecast in January. It cut US GDP growth expectations by 1.2% for 2022 and 0.2% in 2023 from their January forecast. For the Eurozone, it’s even worse, as the recovery has also been slower, with GDP growth expectations down 1.7% and 0.2 for 2023 from the January outlook.
As for inflation, estimates have soared. According to the World Bank, the percentage of countries with inflation above target has risen to 90% in developed economies and 75% in emerging and developing economies.
S&P Ratings also recently warned that the global food shock could last for years, not months.
Now, after the implementation of the largest stimulus package, the boomerang effect is evident. Higher inflation and lower growth. But neither central banks can normalize fast enough because of the risks of contagion from markets and sovereign debt, nor do governments want to cut spending. Thus, the destruction of demand will probably be the only option to curb inflation.
In the United States, the destruction of demand is now tangible. Real wages are falling across all income groups, as Harvard practice professor Jason Furman points out. The University of Michigan’s consumer sentiment index fell sharply to a record high of 50.2, from 58.4 in May, when the consensus expected 59, according to MarketWatch.
It’s too late now. The damage to the global economy is too great, and now mainstream economists are only finding ways to justify the disaster by blaming everything but the excess government and central bank stimuli of 2020. That doesn’t mean that certain targeted measures should not have been implemented. . As mentioned in this column, a supply shock should have been addressed with supply-side measures, tax cuts, and specific programs for small businesses and low-income families. The enormity of the problem created will likely take months to resolve.
Governments don’t want to cut spending, and central bank rate hike plans still leave them well behind the curve and far from normalizing, so the “demand correction” will likely come from the private sector, to begin with. by the loss of consumer wages in real terms and their savings. With 8% inflation in the United States and Europe, salaried workers lose almost a month’s wages every 12 months.
Like all stimulus packages, the backlash will be felt by the middle class and the very families that governments aimed to protect with massive money printing. Monetary policy does not solve structural problems; fiscal policy may have made them worse.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.