July 20, 2015

The peril of cheap money

Courtesy: Mint



Vivek Dehejia in his fortnightly Mint column talks about the state of global monetary affairs.


He writes "...when the holy grail of inflation targeting was discovered, it was thought that optimal monetary policy could make protracted economic downturns a distant memory.

That was the conventional view on the eve of the global financial crisis in 2008. Today, that orthodoxy lies in tatters, and the global economy faces new challenges, whether in the form of the ongoing crisis in the euro zone, or the vexed question of when and how advanced economies such as the US can exit from unconventional monetary policies (UMPs) such as quantitative easing (QE) and forward guidance.


These were some of the themes avidly discussed at the most recent meeting of the Santa Colomba Conference, convened and chaired, as it has been from its inception in 1971, by the Nobel economist, and my own great guru, Robert Mundell. This year, the conference titled “Currency Disorder and Global Monetary Reform”, deliberated, as ever, in the majestic setting of the Palazzo Mundell, a Renaissance villa in the rolling Tuscan hills close to the mediaeval city of Siena.....

As investor Peter Jungen noted at the conference, in a world of asset price inflation, it is more profitable to buy an existing asset than to start a new enterprise—hence the boom worldwide in markets for property, equity, art and vintage cars—many of these being secondary markets in which the same assets turn over repeatedly. Thus, an important side effect of inflated asset prices may well be a diminution of innovation and new business formation—which, in turn, will retard job creation and future growth in productivity, the latter being the chief driver of long-run economic growth".


Click here to read the article.

Topic : State Capacity / In : OP-EDS
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