When the drugs stop working, try a different one or increase the dose. Most central bankers are well aware that their black bag of monetary medicine is running short of remedies to overcome the continuing aftershocks of the 2008 crash.
Brexit is the latest seismic convulsion. And the Bank of England duly handed out the financial equivalent of blue, yellow and pink pills to soothe the fevered brows of consumers and businesses alike.
It’s true, as Brexiters contend, that the dire warnings of the International Monetary Fund and George Osborne’s Treasury that Britain’s economy would fall off a cliff in the event of a vote to leave the European Union have been proved wrong.
It was always unlikely the vote would trigger a repeat of 2008, which was a global financial collapse that dragged the entire developed world down with it. Remainers might want to put their head in the sand, but the vote itself has not caused a 20% drop in property prices or most of the other scary things on the roster of gloomy predictions.
But it is also true that the bounceback in consumer spending and business activity has only recovered some of the ground lost over the preceding six months. More than that, the recovery is largely a result of the devalued pound and the Bank of England’s promise to stimulate the economy with another adrenaline shot.
In the same vein as European Central Bank president Mario Draghi’s “ready to do whatever it takes” speech in the summer of 2012, which soothed the nerves of eurozone investors as Athens burned, the Bank of England made it clear in February, as soon as the vote was called by David Cameron, that it stood ready to give the economy a boost, and duly delivered on 4 August.
A cut in the base rate to 0.25%, an extra £60bn of quantitative easing and £100bn of cheap loans for banks to offset the squeeze from low interest rates was heavily trailed by the Bank’s governor Mark Carney, albeit in the vaguest terms, giving a measure of comfort that a repeat of 2008 could be avoided.
The real problem for Carney is that Brexit hasn’t happened yet. And while David Davis and Liam Fox may yet carve out trade deals for the UK that boost trade, the betting is that in an era of globalisation and the domination of powerful trading blocs, the UK is going to struggle to attract international businesses bringing new jobs.
Most forecasts have reduced the average growth rate over the next four years from above 2% to below 2%. If that turns out to be true, the UK will need a bit more stimulus to help it through. What does the Bank of England have to offer? What about negative interest rates?
Neither the UK or US have allowed their central bank to charge customers – mostly commercial banks – to keep funds on deposit in the way that the ECB and Bank of Japan already do.
Adam Posen, the former Bank interest-rate setter who is now in charge at the Peterson Institute for International Economics in Washington, has urged his former colleagues and the Fed to put aside their reluctance and adopt negative rates.
In his defence Carney can cite warnings from the central bankers’ club, the Geneva-based Bank of International Settlements, which worries that negative interest rates will hit commercial bank profits hard and undermine their ability to make loans.
Robert Shapiro, a former economic adviser to Bill Clinton and head of the Sonecon consultancy in Washington, says the only reason the Fed is considering an increase in rates is to regain some firepower before the next recession. “When you’ve had three quarters of annual growth at around 1%, inflation is low and productivity is around 1% when it should be above 2%, there is still more work to do,” he says.
Like many, he wants governments to use low interest rates to fund infrastructure spending and investments in schools and training. He despairs at Hillary Clinton’s $275bn investment plan, which is fully funded from tax rises and savings in government spending. This money should be borrowed at the current ultra-cheap rates – not least because a policy of ever-cheaper credit is not going to raise productivity. Only an injection of new, freshly minted funds that add to the sum of money in circulation, invested wisely, can do that.
Carney and Draghi have argued this case, only for politicians to take a step back. Stanley Fischer, deputy Fed chief, made the same point before this weekend’s meeting of central bankers at Jackson Hole, Wyoming.
Unfortunately, month by month, the situation is getting more desperate. Three business confidence surveys do not make a trend, but the pessimism registered by Belgian, French and German firms last week could force the ECB to consider further action before its 8 September meeting.
The Bank of England may need to follow suit, however reluctantly, as the post-Brexit fall in sterling pushes up inflation while wages remain stagnant, cutting living standards and growth.
The final nail in the coffin would be a rise in US rates, triggering a rush of funds across the Atlantic, forcing the pound down further and inflation higher. Carney would be forced to switch tack, raising rates to stem the flow. Then he wouldn’t need to worry about the colour of his remedy pills: just the looming recession he will surely be blamed for.