Monetary policy rules global economy

Central banks in developed countries have pumped in vast liquidity injections in a desperate effort for keeping their economies afloat. Such a move avoided the worst from happening. Yet it has proved unable to deliver a solid growth pace. Extra money leads to rising asset prices while output fails to follow suit.

Few notice that injecting liquidity doesn’t necessarily entail a broadened and lively monetary base. Firms and individuals profit from the current easy-going climate for reducing their indebtedness, while net credit and money demand maintain their sluggish trend.  The IMF last world report shows a dismal picture, as emerging economies struggle for keeping abreast confronted with currency depreciation and low prospects for investment and expansion. Brazil and Argentina will fall into recession. China is likely to reduce its growth rate. Oil-exporting countries face harsh times. Most developed countries can only expect a mild recovery. Thus world output and trade is bound to decelerate.

The IMF casts most of the blame on Europe, as Germany and other net saving economies further pursue their budget tightening, cutting short any hope for a swift upsurge. As the US experience shows, only a combined monetary loosening and a soft fiscal stance can significantly upgrade the economic performance. Cheap money does help but it fails invigorating demand on its own.

Europe lags behind both in setting up a credible growth strategy and in enforcing structural reforms for increasing productivity. For all the massive liquidity the ECB is thrusting into the economy, recovery still looks rather shaky.

As global governance grounds itself on monetary policy, further problems lie ahead. Janet Yellen is experiencing huge difficulties in disentangling the US from the zero-rate stance the FED has followed for the last six years. Attempts for securing a soft landing are proving self-defeating as the ensuing strong dollar threatens domestic and worldwide growth. There is no easy way for tightening monetary conditions, once you become trapped in a free-money scenario.