Bill Gross’s policy prescription
According to Bill Gross, most central bankers believe that lower interest rates help create wealth in the economy. This ultimately flows out to spur overall economic activity. To some extent, this has worked. Europe (VGK) (FEZ) and Japan (EWJ) are above the line. However, with demand conditions low around the globe (ACWI), monetary policy has lost its potency.
Growth hasn’t gathered steam in all these years despite monetary policy easing measures in most developed (EFA) (VEA) nations. Negative interest rates in Europe and Japan, for example, have a negative effect on the real economy. With growth refusing to pick up pace, labor market slack may be here to stay.
Time for fiscal policy to take the baton
Since monetary policy hasn’t been able to do what’s needed, fiscal policy should take the baton and run its leg of the race. We haven’t seen this happen so far because the mindset is anti-Keynesian. Look at Europe, at the IMF (International Monetary Fund). Central bankers and monetary policy authorities are left with no option but to lend money to crippling economies that aren’t able to balance their budgets.
Why can’t fiscal policy measures take up the cause? Why don’t these governments spend money to spur economic activity opposed to simply relying on interest rates and monetary policy tools to provide the fix?
Read G20 leaders are emphasizing fiscal policies for more perspective.