the reason for the award to the former Fed number one (and quantitative easing) – Corriere.it

The Nobel Prize in economics to former Federal Reserve Chairman Ben Bernanke – along with two other economists, scholars like him of banking crises – seems the symbolic seal to an era that has ended. Bernanke is associated with zero interest rates and “quantitative easing”, the massive purchases of bonds by the American central bank, which was then imitated by many of his sisters, including Mario Draghi’s ECB. That therapy was adopted twice, first to cure the financial crash of 2008 – partly related to mortgages subprimebut also to an energy shock – then to save the world from a recession during the pandemic.

Bernanke, for 14 years at the helm of world monetary policy

With brief interruptions, monetary policy remained under Bernanke’s sign for around 14 years. But today we are in a next chapter of history, Jerome Powell’s Fed leads central banks in a classic “Eighties” therapy, steep interest rate hikes to cure inflation. With a strong dissonant element, however, because the budgetary policies practiced by the major governments are on a collision course with what central banks do. The first central bank to raise its rates, even anticipating the Fed, was that of Brazil in the summer of 2021. After the Fed, as many as 33 central banks have queued, unable to do otherwise. Economic historian Adam Tooze notes that even in the 1980s, monetary tightening did not involve so many central banks. Such is the centrality of the dollar: if its yields rise, other countries must adjust theirs. If they don’t, they expose themselves to capital flight, monetary devaluation. And their dollar debts become unsustainable to the point of risking sovereign bankruptcy.

The world dominated by the dollar and the role of China

We live in a world that is still dominated by the dollar, although neither Putin nor Xi Jinping like it. China tried to disengage itself from the Fed’s tow, in 2022 it followed a different path, lowering its rates to try to counter the brutal slowdowns of its economy. But this Chinese divergence has costs: haemorrhaging of foreign exchange reserves, that is capital flight, as well as a further increase in the price of those raw materials that Beijing must continue to pay mainly in dollars. However, China is a giant, the second largest economy in the world behind America’s, and thanks to its exports it has a balance of payments in surplus. The vast majority of countries are weaker than you. The world is divided in two and the discriminating factor is the dollar. Those emerging countries that export commodities, like Saudi Arabia, collect dollars and accumulate dollar credits so they are on the winning side. Most poor countries, on the other hand, are on the other side of the fence: dollars must be procured to pay for imports; and they have old dollar debts to repay with increasingly heavy currency.

The first “global” deflation

On the other hand, those countries have in the past profited from the Fed’s role as “lender of last resort” and hoarded dollar investments when they cost nothing. According to Tooze we are about to witness the “First truly global deflation”because almost all moving in unison to raise interest rates central banks add and enhance the effects of the slowdown. Not surprisingly, he stresses, this global deflation also coincides with a geopolitical crisis of globalization, the revision of the central US-China relationship with all its consequences.

US public debt over 100% of GDP for the first time

America’s own financial health is being questioned by those who observe that its public debt has exceeded 100% of GDP for the first time in history. From 2007 to 2022, US Treasury Bills in circulation tripled. However, America has a unique imperial privilege in the world. It can borrow in its own currency, it can print it practically without limits because it knows that all other countries accept it as a means of payment and as a safe-haven asset..
This invincible shield does not apply to the private sector, however: the debts of US companies in a decade have risen from 40% to 50% of GDP. Even for savers, the squeeze of central banks rates has a downside: while waiting for yields to finally offset the inflation that impoverishes purchasing power, the capital of old fixed-income securities accumulated by years in pension funds and investment funds. It is a relentless arithmetic rule: qwhen the yields of the new securities rise, the value of the old ones which constitute a large part of the saver’s portfolio decreases. Where it is confirmed that inflation, indirectly or for the monetary “cure” it unleashes, is a tax on savings, particularly severe in an aging society.

The war and the acceleration of public deficits

One foot presses the accelerator, the other is pressed on the brake pedal. This image describes the economic policies of the West on the threshold of the new historical epoch marked by the scarcity of money and the high cost of credit. Central banks are crushing the brake, as we have seen: their action tends to appease inflation by stopping economic growth and consumption. Instead, governments continue to practice opposite fiscal policies. The pandemic is over or almost over, a new reason for widening public deficits is war.
Everyone is trying to mitigate the damage that the war in Ukraine and the sanctions or counter-sanctions inflict on families and businesses.
Germany has said goodbye to budgetary rigor, with the 200 billion euro maneuver of September 2022 to offset the expensive bills. Germany and France have nationalized two large energy utilities (Uniper, Edf), at the expense of the taxpayer. England launched such a spendthrift budget that the pound plummeted. Even before the Draghi government left the scene, Italy had already spent 3% of its GDP on aid to families and businesses against expensive energy: less than Germany, in proportion to GDP, but still substantial public spending. All these expenses of the EU governments are in addition to the 750 billion already foreseen by the Recovery Plan or Next Generation EU. But even the United States, which also suffered from the energy shock to a lesser extent than Europe, the public deficit has started to gallop again.

One of Biden’s most “spendthrift” measures was the cancellation of debts contracted by students to pay for the university: $ 400 billion to be paid by the taxpayer. Decided on the eve of the November 2022 mid-term legislative elections, that provision was a typical case of a “swap vote” to win the consensus of Generations X and Z. It is a transfer of resources from the tax-paying working classes. but they do not send their children to university, in favor of the middle classes with a degree. It is an implicit amnesty for the greed of the universities, whose race to the rise of the fees is supported by a shower of public money.
However, it has put the Biden administration in the same category as European governments, committed to spending more just as central banks are trying to decrease the purchasing power in circulation.
Between the pandemic and the war in Ukraine, all Western countries spent 10% of GDP on transfers to families and businesses, plus another 6% of GDP on subsidized anti-crisis loans.
The question is this: governments are practicing leniency and social justice, why with the recession to come, they are using public budgets to cushion the damage to us all? Or are they hindering the action taken by central banks to tame inflation, and therefore the additional public deficits will only result in forcing the Fed and the ECB to even stronger and prolonged rate hikes? With one foot on the accelerator and one foot on the brake, who will win?

Subscribe to Federico Fubini’s “Whatever it Takes” newsletter. Strong data, facts and opinions: the challenges of the week for the economy and markets in an unstable world. Every Monday in your inbox.

And don’t forget the newsletters The Economy Opinions ”

and “L’Economia Ore 18”.