Like a lot of people, I remember where I was when I first heard the news about what came to be called the global financial crisis.
It wasn’t quite a JFK / Moon Landing / Michael Hutchence dying moment in the Australian collective consciousness, but it was pretty hard to ignore the sense of panic.
In October 2008, George W Bush was still the US President, Hawthorn had a couple of weeks before won the AFL grand final, and P!nk was topping our charts singing about her break up.
That was when, months into the building American financial crisis, and on the heels of a US investment bank’s recent collapse, the world’s media reported on a global stock market panic. In its wake, freshly elected President Obama faced double digit unemployment and deflation. At home, the Australian government had to act quickly to stimulate our economy.
It’s unsurprising that nearly five years later, the world’s leaders are still dealing with the GFC’s fallout. We might not have the same feeling of panic – perhaps because of the time that has passed, or possibly because the Australian government’s stimulus cushioned us from the effects of the crisis so well. But for people across the world in both emerging and advanced economies, the GFC is still of daily significance. And it’s important to us, because other countries’ actions – including in monetary and fiscal policy – affect our economy.
At the moment, the World Bank and IMF are holding their spring meetings, in Washington DC. The G20 will also be meeting. And the G24 – a group of developing countries – met yesterday (Australian time).
One of the G24’s hot topics is “unconventional monetary policy”. That’s because from late 2008 the US Federal Reserve – nicknamed ‘the Fed’ – decided it could no longer do only what it had always done: it would have to experiment. The consequences of its experiments are an issue of keen concern, including for developing nations.
The Fed’s job is to keep a lid on unemployment and inflation, while managing interest rates. Like our own Reserve Bank, it traditionally does so by taking steps to manage interest rates. But after the GFC hit, the Fed decided to try some unconventional things, like changing the way it handled public relations, and the unprecedented step of buying hundreds of billions of dollars of assets. These were attempts at stimulating the economy using monetary policy.
Other major economies undertook their own ‘unconventional monetary policy’ measures. The effects have been felt across the world. And earlier this month, the Bank of Japan announced it would buy assets worth tens of trillions of yen.
In the communiqué issued yesterday, after their meeting, the G24 spoke of their concern about ‘the fragility and pace of global recovery’ because of protracted difficulties and uncertainties in ‘advanced economies’ including the US. And they asked richer countries to think about how their own domestic policy might affect developing nations.
“We call on [advanced economies] to take into account the negative spillover effects on [emerging economies and developing countries] of prolonged unconventional monetary policies, including on inflation and the volatility of capital flows and commodity prices,” their communiqué said.
They were repeating a sentiment expressed by developing countries in the years since the Fed bought its first massive block of assets.
University of California, Berkeley Professor and economist Barry Eichengreen has explained why Brazilian finance Minister Guido Mantega once referred to the Fed’s experiments as ‘currency wars’:
“Mantega’s implied criticism was that the unconventional monetary policies of the Federal Reserve to ward off deflation and stimulate a depressed economy were beggar thy neighbor,” Eichengreen said, in a paper on the topic earlier this year.
“They unleashed a tsunami of capital flows toward emerging markets, resulting in inflation, currency appreciation, loss of competitiveness and worrisome upward pressure on asset prices,” he said.
But Bank of Japan Governor Haruhiko Kuroda yesterday said Japan’s recent announcement was purely for domestic reasons.
“It is absolutely not aimed at weakening the yen,” he said.
Japan is Australia’s second largest export market. Their move seems likely to be good news for us.
But as part of an international community, we ought to also care about how the big economies’ central banks’ “unconventional” moves might affect poorer countries.
- ‘Unconventional Monetary Policy and the Dollar’ (economistsview.typepad.com)
- Infographic: What is Quantitative Easing? (mint.com)
- WRAPUP 2-G20 gathers for debate on debt, monetary stimulus (xe.com)