An unconventional truth By Nouriel Roubini February 1, 2015 –

Who would have thought that six years after and most emerging-market currencies. Gold the global financial crisis, most advanced prices since the fall of 2013 have tumbled economies would still be swimming in an from $1,900 per ounce to around $1,200. And alphabet soup – ZIRP, QE, CE, FG, NDR, and was the world’s worst-performing U-FX Int – of unconventional monetary currency in 2014, its value falling by almost policies? No had considered any 60%. of these measures (zero interest rate policy, To be sure, most of the doomsayers have quantitative easing, credit easing, forward barely any knowledge of basic . But guidance, negative deposit rate, and unlimited that has not stopped their views from foreign exchange intervention, respectively) informing the public debate. So it is worth before 2008. Today, they have become a asking why their predictions have been so staple of policymakers’ toolkits. spectacularly wrong. Indeed, just in the last year and a half, the The root of their error lies in their confusion European Central Bank adopted its own of cause and effect. The reason why central version of FG, then moved to ZIRP, and then banks have increasingly embraced embraced CE, before deciding to try NDR. In unconventional monetary policies is that the January, it fully adopted QE. Indeed, by now post-2008 recovery has been extremely the Fed, the Bank of England, the Bank of anemic. Such policies have been needed to , the ECB, and a variety of smaller counter the deflationary pressures caused by advanced economies’ central banks, such as the need for painful deleveraging in the wake the Swiss National Bank, have all relied on of large buildups of public and private debt. such unconventional policies. In most advanced economies, for example, One result of this global monetary-policy there is still a very large output gap, with activism has been a rebellion among pseudo- output and demand well below potential; thus, and market hacks in recent years. firms have limited pricing power. There is This assortment of “Austrian” economists, considerable slack in labor markets as well: radical monetarists, gold bugs, and Bitcoin Too many unemployed workers are chasing fanatics has repeatedly warned that such a too few available jobs, while trade and massive increase in global liquidity would globalization, together with labor-saving lead to hyperinflation, the US dollar’s technological innovations, are increasingly collapse, sky-high gold prices, and the squeezing workers’ jobs and incomes, placing eventual demise of fiat currencies at the hands a further drag on demand. of digital krypto-currency counterparts. Moreover, there is still slack in real-estate None of these dire predictions has been borne markets where booms went bust (the United out by events. Inflation is low and falling in States, the , , , almost all advanced economies; indeed, all , and ). And bubbles in other advanced-economy central banks are failing to markets (for example, China, Hong Kong, achieve their mandate – explicit or implicit – Singapore, , Switzerland, France, of 2% inflation, and some are struggling to Sweden, Norway, Australia, New Zealand) avoid . Moreover, the value of the dollar has been soaring against the yen, euro, pose a new risk, as their collapse would drag however, is a zero-sum game that merely down home prices. exports deflation and recession to other Commodity markets, too, have become a economies. source of disinflationary pressure. North Perhaps more important has been a profound America’s shale-energy revolution has mismatch with . To be effective, weakened oil and gas prices, while China’s monetary stimulus needs to be accompanied slowdown has undermined demand for a by temporary fiscal stimulus, which is now broad range of commodities, including iron lacking in all major economies. Indeed, the ore, copper, and other industrial metals, all of , the UK, the US, and Japan are all which are in greater supply after years of high pursuing varying degrees of fiscal austerity prices stimulated investments in new capacity. and consolidation. China’s slowdown, coming after years of Even the International Monetary Fund has over-investment in real estate and correctly pointed out that part of the solution infrastructure, is also causing a global glut of for a world with too much supply and too little manufactured and industrial goods. With demand needs to be public investment in domestic demand in these sectors now infrastructure, which is lacking – or crumbling contracting sharply, the excess capacity in – in most advanced economies and emerging China’s steel and cement sectors – to cite just markets (with the exception of China). With two examples – is fueling further deflationary long-term interest rates close to zero in most pressure in global industrial markets. advanced economies (and in some cases even Rising income inequality, by redistributing negative), the case for infrastructure spending income from those who spend more to those is indeed compelling. But a variety of political who save more, has exacerbated the demand constraints – particularly the fact that fiscally shortfall. So has the asymmetric adjustment strapped economies slash capital spending between over-saving creditor economies that before cutting public-sector wages, subsidies, face no market pressure to spend more, and and other current spending – are holding back over-spending debtor economies that do face the needed infrastructure boom. market pressure and have been forced to save All of this adds up to a recipe for continued more. slow growth, secular stagnation, disinflation, Simply put, we live in a world in which there and even deflation. That is why, in the is too much supply and too little demand. The absence of appropriate fiscal policies to result is persistent disinflationary, if not address insufficient aggregate demand, deflationary, pressure, despite aggressive unconventional monetary policies will remain monetary easing. a central feature of the macroeconomic landscape. The inability of unconventional monetary Nouriel Roubini, a professor at NYU’s Stern School of policies to prevent outright deflation partly Business and Chairman of Roubini Global Economics, reflects the fact that such policies seek to was Senior for International Affairs in the weaken the currency, thereby improving net White House’s Council of Economic Advisers during exports and increasing inflation. This, the Clinton Administration.