Central banks: will the gift keep on giving?
Monetary policy has delivered global growth and booming asset prices. During the financial crisis and its aftermath, central bankers demonstrated admirable pragmatic radicalism. But monetary policy is not a cure-all, and another global downturn will present an even tougher test for policymakers.
Small children that spent the last weeks of 2017 looking forward to Christmas are not alone in thinking that magical men have the power to shower the world with gifts from on high. In the Pacific island archipelago of Vanuatu, the people of Tanna look to the skies hoping that the messiah of their cargo cult, John Frum, will send down all manner of extravagances, just as fantastical flying machines – USAF airplanes – did for their ancestors during World War II.
Investors also have reasons to be thankful to a magic circle of (mostly) men: central bankers. A decade ago, shuffling doomsayers with sandwich boards declaring the end of the world were feted as prophets. Today, credit spreads and volatility are at historic lows, bog standard equities trade at dizzying multiples and the world is enjoying an inflation-free surge in synchronized growth across developed and emerging economies.
Central banks have been called the only game in town. The deck was not stacked in their favour in 2008, but they reached into a new box of tricks. They slashed interest rates to zero and beyond, flooded the financial system with unprecedented liquidity via quantitative easing and discounted loans and, with a remarkable sleight of hand, simultaneously reduced the risk of another economic shock emanating from the banks.