Loose monetary policy not solely to blame for present economic conditions.

Martin Wolf in the FT wrote an interesting piece in the FT yesterday talking about loose monetary policy and not to wholly blame the central banks for the economic environment today. Below are some of the main points that he makes:

• Deregulation of financial markets, free trade and China joining the WTO in 2001 lowered the global inflation rate.

• Huge savings were prevalent in the global economy – especially in China and Germany

• Balance global demand and supply = big investment in housing driven by financial liberalisation.

• COVID – money growth exploded with expansionary monetary and fiscal policy.

• Fiscal deficit of G7 countries jumped by 4.6%.

• Monetary – quantitative easing and stimulatory level of interest rates

• With supply chain issues, China’s lockdown and the Ukraine War, the dramatic increase in demand could not be met by a corresponding increase in supply. See graph

• Inflation = higher interest rates = shock to banking system

• Loose monetary not the blame for what has gone wrong in the global economy

• Mistake to think that there is a simple solution to the failing of the banking systems

Things would not be wonderful if central banks had stood idly by. We cannot abolish democratic politics. Economic policy must be adapted to our world, not to the 19th century. Martin Wolf

Source: IMF

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