OPINION: The three 'Ps' are at the top of my list of concerns: protectionism, populism and political dysfunction.
NEW HAVEN, Conn. — Predicting the next crisis — financial or economic — is a fool’s game. Yes, every crisis has its hero who correctly warned of what was about to come. And, by definition, the hero was ignored . But the record of modern forecasting contains a note of caution: those who correctly predict a crisis rarely get it right again.
In this vein, the source of vulnerability that I worry about the most is the overextended state of central-bank balance sheets. My concern stems from three reasons.Assets of major central banks —the Federal Reserve, the European Central Bank, and the Bank of Japan — collectively stood at $14.5 trillion in November 2019, which is down only slightly from the peak of around $15 trillion in early 2018 and more than 3.5 times the pre-crisis level of $4 trillion.
Central banks believed that what worked during the crisis would work equally well during the recovery. That didn’t happen. The combined nominal GDP of the United States, eurozone, and Japan increased by $5.3 trillion from 2008 to 2018, or only about half their central banks’ combined balance-sheet expansion of $10 trillion in over the same period. The remaining $4.
So why is all this problematic? After all, in a low-inflation era, inflation-targeting central banks seemingly have nothing to fear about continuing to err on the side of extraordinary monetary accommodation, whether conventional or unconventional . The problem also lies in weak real economies that are far too close to their stall speed. The International Monetary Fund recently lowered its estimate for world GDP growth in 2019 to 3% —midway between the 40-year trend of 3.5% and the 2.5% threshold commonly associated with global recessions.
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