Afternoon Must-Read: Ryan Avent: Monetary Policy: Dead Economies Blow No Bubbles

Ryan Avent: Monetary policy: Dead economies blow no bubbles: “The stopped clock that is the Bank for International Settlements…

…is showing the same face…. In 2011… the BIS argued that global growth needed to slow in order to reduce inflationary pressure. In 2012 it warned that central banks shouldn’t do any more to boost growth lest they create financial instability and discourage structural reform…. In its latest annual report, it argues that what the world needs now is higher interest rates. One of these days the BIS may just turn out to be right. Not this year…. Low rates are not doing much to help the real economy, BIS says, but are contributing to another worrying credit boom…. Because it knows the result it wants (higher interest rates) it misreads the particular risks of the moment…. It was until very recently taken for granted that loose money meant policy that allows for excessively fast demand growth…. Rich economies currently suffer from none of those ailments. One could conclude then that policy is not too loose. Instead, the BIS, which is pretty sure that it is, finds a different measure of policy looseness with which to justify its call for higher rates: the financial cycle…. Raising rates now would almost certainly be counterproductive…. As markets priced in a perpetual slump (and lower inflation or deflation) long-term interest rates would edge even lower. Weak demand would also reduce the growth boost to structural forms, making them a harder sell, and would lead to still more deterioration in public balance sheets…