Central Bank Easing: The Global Trend in 2019

August 6, 2019

Central banks around the world embrace monetary easing to counter slowing growth, raising questions about the limits of such policies.

In 2019, central banks around the world found themselves facing a common dilemma: how to revive economic growth that seemed to be slowing across the globe. With trade tensions rising, particularly between the United States and China, and economic growth in key regions showing signs of stagnation, central banks took bold steps to counteract these trends. The solution, it seemed, lay in the familiar tool of monetary easing—a strategy that had been employed in the wake of the 2008 financial crisis but now seemed to be a permanent fixture in global economic policy.

The question, however, was whether such policies were merely a temporary fix or whether they were pushing the limits of what monetary policy could achieve. As central banks embarked on a path of lower interest rates and increased bond-buying, critics began to wonder: how long could this trend continue before it led to unintended consequences?

In many ways, the situation mirrored the complex and often tragic characters of classic literature, whose decisions—whether motivated by ambition, greed, or fear—set them on paths they could not escape. Take, for example, the character of Dr. Faustus in Christopher Marlowe’s play. Faustus, in his quest for unlimited knowledge and power, makes a pact with the devil, ultimately discovering that his desire for control and influence comes at a devastating cost. The central banks’ approach to easing—relying on ever-lower interest rates and an expansionary monetary policy—may well be a modern parallel to Faustus’s bargain: a desperate pursuit of stability that, over time, could lead to consequences beyond anyone’s control.

The Global Easing Trend: A Closer Look

In the first half of 2019, the European Central Bank (ECB), the Federal Reserve, and the Bank of Japan were among those central banks that signalled a shift towards more aggressive monetary easing. The ECB, under the leadership of Mario Draghi, hinted at the possibility of new interest rate cuts and even further bond-buying measures. The Federal Reserve, under Chairman Jerome Powell, did not hesitate to reduce interest rates in response to slowing growth and trade uncertainty. And in Japan, where the economy had long struggled to achieve meaningful inflation, the Bank of Japan continued its ultra-loose monetary policy, essentially creating an environment where borrowing was cheap and plentiful.

From a theoretical standpoint, monetary easing has a simple purpose: to stimulate economic activity by lowering the cost of borrowing. When central banks cut interest rates or purchase government bonds, they inject liquidity into the economy, hoping that businesses and consumers will respond by increasing investment and spending. In times of uncertainty, like 2019, these policies aim to counteract the drag on growth caused by weak demand, global trade tensions, and political instability. However, the impact of such policies is not always as straightforward as it seems.

The risk, as many critics have pointed out, is that prolonged monetary easing can have unintended consequences. While these policies might initially stimulate economic activity, they can also encourage excessive risk-taking, create asset bubbles, and contribute to rising inequality. As the economist and author John Maynard Keynes once observed, “The long run is a misleading guide to current affairs. In the long run, we are all dead.” In a similar vein, central banks could find themselves caught in a cycle where they are forced to continue easing just to keep the economy from sliding into recession—much like the mythical characters whose desires only lead them deeper into turmoil.

The Limits of Monetary Easing: Consequences and Risks

The key challenge with the current global trend of monetary easing is that it is becoming increasingly difficult for central banks to achieve the desired effects without running into diminishing returns. After all, interest rates cannot fall indefinitely. In the United States, for example, the Federal Reserve had already slashed rates to near zero following the 2008 financial crisis, and the ECB’s deposit rates had entered negative territory, an unprecedented policy move in the modern world. What happens when interest rates are already near zero, and economic growth continues to falter?

This is where the analogy with literature becomes particularly striking. Just as a character in a novel might begin with noble intentions, only to become ensnared in a downward spiral of actions with unintended consequences, so too have central banks found themselves in a position where their policy choices are constrained by their own past decisions. The ECB, for instance, faced the stark reality that further rate cuts might not have the same impact as they did in previous years. Instead, they could end up exacerbating the very problems they sought to solve—by discouraging savings, inflating asset prices, and fostering a dependence on cheap credit that could become unsustainable.

Consider the tragic fate of Charles Dickens’ Bleak House, in which the central legal case, Jarndyce v. Jarndyce, drags on interminably, its resolution always just out of reach. The case stands as a symbol of the consequences of inaction, where the desire to achieve justice leads to a situation that is ultimately more damaging than if action had been taken sooner. In the same way, monetary easing, though initially presented as a solution to economic stagnation, risks becoming a long-running experiment that only perpetuates the very issues it is meant to address.

For central banks, the fear is that by continuing to implement expansionary monetary policies in the face of slowing growth, they risk distorting the economy even further. Asset prices could become unsustainably high, leading to the possibility of a market crash. Businesses could become too reliant on cheap credit, making them vulnerable to future interest rate hikes or the withdrawal of monetary stimulus. In other words, central banks might find themselves in a position where they are unable to extricate themselves from their own policies, much like the characters in Dostoevsky’s Crime and Punishment, who find themselves trapped by their actions and unable to escape their fates.

The Path Forward: Is There an Alternative?

Given the challenges associated with monetary easing, the question becomes: is there an alternative path for addressing the global economic slowdown? One possibility is a return to fiscal policy. While monetary easing focuses on increasing the supply of money and making credit cheaper, fiscal policy focuses on government spending and taxation to stimulate demand directly. Governments could increase infrastructure investment, cut taxes, or provide direct financial assistance to households in order to encourage spending.

Fiscal policy, however, is not without its own risks. Just as in The Great Gatsby, where the pursuit of wealth and status ultimately leads to personal and moral destruction, so too can excessive government spending and borrowing lead to long-term consequences. There is always the risk of inflation or higher public debt, which could strain government finances in the future.

Moreover, fiscal stimulus requires political will, which is often lacking in times of uncertainty. In a world where global trade tensions and political divisions seem to be intensifying, the ability to enact meaningful fiscal policy may be more difficult than it appears.

Conclusion: The End of the Easing Era?

As we stand in 2019, central banks are continuing to pursue monetary easing, but the question of whether this policy can continue to deliver the desired outcomes is increasingly uncertain. Just as in the works of literary giants like William Blake, who explored the tension between innocence and experience, so too do we find ourselves navigating the tension between economic growth and the limitations of monetary policy. Central banks are caught in a delicate balancing act, where each decision carries the potential for both success and failure. Whether their efforts will lead to a lasting recovery or merely deepen the world’s economic malaise remains to be seen.

Much like the fates of characters in classic novels, the economic story of the 21st century is one of choices, consequences, and the unpredictable outcomes of well-meaning actions. For now, the global trend of monetary easing continues, but the road ahead is as uncertain as ever. Whether central banks will be able to achieve the stability they seek or whether they will find themselves trapped in an endless cycle of intervention remains to be determined.