Since the late 1980s, the principal weapon used against economic setbacks by the central banks of western developed economies has been ever looser monetary policy. This approach initially worked well, serving to support both real economies and asset prices. Those of us who were lucky enough to get on the housing ladder at the beginning of this debt-fuelled growth have been enriched by it. But interest rates are now effectively in negative territory, and central banks have run out of room. Loose monetary policy is ceasing to act as a catalyst for real economic growth, merely achieving the inflation of increasingly high asset values. Yields on prime commercial property in central London are lower than ever, and the Bank of England’s latest stimulus will drive values higher and yields even lower. The desire to force people to invest and spend, by making it ever more expensive to save, is leading our economies towards an asset bubble, the bursting of which will dwarf the effects of the 2008 credit crunch.
Holger Schmieding, chief economist at Berenberg, says No.
Caution reigns supreme in the post-Lehman era. Across the Western world, households are trying to save more and companies are borrowing less than in previous economic upswings. As a result, the interest rate that balances the supply of and demand for savings is much lower than before. In addition, investors are paying a premium for assets they consider safe, especially for bonds of countries with a reasonable credit rating. To keep aggregate demand close to the pace of supply growth, central banks need to run a monetary policy that is more aggressive than in pre-Lehman upswings. Negative interest rates largely reflect heightened risk aversion and the new balance of supply and demand for savings. Economies can cope with this while savers need to venture into more risky assets to earn a return. Banks need to provide better services for which they can get paid instead of simply playing the yield curve. That is tough. But it is not a looming disaster.