Tight Money, Easy Credit

It’s getting difficult to even read the news without throwing a brick at the computer screen.  The world economy appears to be in the hands of people who don’t understand the difference between easy money and easy credit.  Here’s the Financial Times:

Opponents contend that the Fed’s third round of quantitative easing – nicknamed QE3 – has triggered volatile capital inflows into emerging markets, leading to an appreciation of their exchange rates, weighing on trade, and creating threats to financial stability.

Guido Mantega, Brazil’s finance minister and one of the Fed’s most vociferous critics, on Saturday labelled the Fed’s ultra-loose monetary policy as “selfish”.

Inflation has averaged 1.4% over the past 50 months, but apparently that’s still too high for Mr. Mantega.  America is “selfish” for not accepting even higher unemployment in order to drive inflation even lower.  We are being lectured to for running an excessive 1.4% inflation rate by the central banker of a country that not too long ago averaged 70 percent annual inflation for three decades.

At the other extreme is the Japanese:

Mr Shirakawa warned over the weekend of the “collateral damage” caused by an abundance of easy credit from developed markets to the rest of the world. “With the deepening of globalisation, no responsible policymaker could now dismiss the cross-border spillovers and feedbacks of their policies,” he said.

The BoJ chief called on officials in advanced economies to be more patient. He noted that despite “aggressive” and unconventional monetary policy, the growth trajectory of Europe and the US in the four years following the Lehman crisis had been lower than that of Japan following the bursting of its asset bubbles at the end of the 1980s.

“We have to accept that the growth rate may have to be lower” until excess debt is worked off, Mr Shirakawa said. “Unless we come to terms with this fact, recovery could be endangered by the adoption of inopportune and inappropriate policies, driven by discontent among the general public, that could erode efficiency and destabilise the global economy.”

Yes, we have a lot to learn from the central banker of a country that has presided over two decades of falling nominal GDP.  And notice the confusion between credit (which is not controlled by the central bank) and monetary policy, which is controlled by the central bank.

Right now the world has a saving glut or an investment drought (probably the latter) and hence real interest rates are low.  There’s not much the Fed can do about that other than adopt a higher NGDP target in the hopes that faster economic growth will raise real interest rates (but don’t expect miracles.)  But the Fed most certainly can increase American NGDP, which would help developing countries by increased global trade.

Christine Lagarde, managing director of the IMF, indicated that the IMF could relax its position against capital controls to take into account the impact of ultra-loose monetary policy in advanced economies, which she acknowledged was likely to spur large and volatile capital flows to emerging economies.

“We have been working on refining our institutional view on the liberalisation and management of capital flows from the perspective of countries that receive and those that generate capital flows,” she said on Sunday.

Now the confusion between easy money and easy credit is leading the IMF back to the bad old days of interventionist policies, such as capital controls.  There is no reason why easy money in the US should lead a developing country to adopt capital controls.  If their economy is overheating then they should tighten up on monetary policy.

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