The roughly $22 trillion of liquidity the Federal Reserve, European Central Bank, Bank of Japan and Bank of England are pumping into financial systems matches the size of annual U.S. output. That may be just the start, as the odds of new outbreaks threaten to pulverize demand from China to Brazil.
It’s also a reason to worry about a lost decade for global growth that sets back living standards more than economists and investors realize.
As if often the case in gloomy economic moments, attention turns to Japan, where deflation has been the reality for two decades now. Though the BOJ made some progress since 2013 generating upward price pressures, the “deflationary mindset” Governor Haruhiko Kuroda sought to change is reasserting itself.
What’s more, as gross domestic product, factory activity and retail sales crater, disinflationary forces may be intensifying. Yet the why part of the Japanese puzzle—why epic easing by the third-largest economy hasn’t re-ignited inflation—is worth exploring more than ever as officials in Washington, Frankfurt, London and elsewhere read from the same playbook.
Since 1999, zero interest rates have been the norm in Japan, which pioneered quantitative easing. Since 2013, Kuroda led Tokyo into territories previously unknown to monetary science. Today, Fed Chairman Jerome Powell is likewise wandering away from central banking norms that still seemed intact before the coronavirus crisis. That goes, too for the ECB and BOE.
Yet, as Japan shows, audacious monetary easing tends to make things worst in the longer run. The problem: how countries letting central banks lead rescue efforts exacerbates inequality.
The Fed should’ve learned this lesson after 2008. At the time, then-Chairman Ben Bernanke embraced QE to save an economy essentially hurtling off a cliff. That life-support effort stuck around too long. The longer it persisted, the more ultra-easy policies morphed into a regressive wealth transfer to the haves from the have-nots. Those with sizable property and asset investments thrived. Everyone else struggled. Some recovered, many didn’t.
The same is true of Japan, an economy once prized for egalitarianism. Though rising competition from China is depressing wages, QE policies enriched the land- and asset-owning class at the expense of the masses. Why, then, would Japan yet again be betting on BOJ policies to end deflation?
Fans of Prime Minister Shinzo Abe point out that Tokyo is ginning up more than $2 trillion of spending, more than 40% of GDP, to restore confidence. This largess, though, is its own life-support gambit. It may halt the bleeding in GDP terms, but it won’t increase national competitiveness. It won’t jumpstart innovation, unleash a wave of startups or boost productivity.
Nor will a fiscal jolt incentivize CEOs to suddenly fatten paychecks, kicking off a virtuous cycle of rising wages and consumption. In the first quarter, for example, cash hoarding among companies rose to $4.5 trillion, an eye-popping 89% of GDP. What’s needed is for Abe to get serious about the structural reforms he’s been pledging for nearly eight years.
Deflation tends to be a monetary phenomenon, a matter of too little money in circulation. Japan’s problem, though, isn’t the amount of yen sloshing around the system, but uses for it. Because banks, companies and households lack confidence about the future, little lending and borrowing takes place. It costs Japan the multiplier effect that makes central banks so potent.
Over time, though, it’s led to the zombie-fication of so much of Japan’s entire economy. All that free money took the onus off CEOs to raise their competitive games. Companies came to depend on loans to stay afloat, while dwindling profits make it hard to cover debt payments. As industries become bogged down with corporate zombies, they become less vibrant.
The U.S., eurozone and U.K. are on a similar trajectory as the central banks play the role of mere ATMs—a $22 trillion ATM among just the G4 monetary authorities. All that largess won’t increase America’s productivity or narrow the rich-poor divide. It won’t make Europe more innovative or get it closer to the fiscal union needed to balance regional growth. It won’t modernize the U.K. manufacturing sector.
All that liquidity might break the global economy’s fall. But with no vibrant export destination and few true reformers in government, all that cash is likely to accelerate the trickling up of wealth away from middle- and lower-income households. Free money is coming at a huge cost.