Champion or chump?

Central banks, and therefore central bank Governors, are widely perceived to be the key players in their economies – giving the  adjective “central” an entirely new and more powerful twist than it used to carry in this context. Their role in recent years has been to invent, develop and deploy new tools that can tackle the formidable challenges facing financial systems and entire economies in the wake of the crash and Great recession of 2007-09.

The mere fact that that crash did not end in a total implosion of the financial system, but rather that disaster was averted, that there was no second depression a la 1930’s, is evidence of the success of these efforts. The gradual stabilization and return to health of major economies over the last nearly-five years is further evidence, indeed clear proof, that central bankers are indeed the most important persons in their national economies, and by extension it is they who chart the course of the global economy.

These facts and developments explain why the statements and actions of central bankers are the subject of intense scrutiny, from speculation in advance to detailed analysis in real-time and to even more detailed research in retrospect. It is therefore natural that financial media organs conduct surveys and award central bankers prestigious titles, such as “Central Banker of the Year” for a region, category of countries (eg Emerging Markets) or, best of all, the entire world.

The foregoing is the mainstream view of the world. As such it is espoused by the mainstream media (MSM), who are the people and institutions who make the aforementioned awards. There is, however, an alternative view. This says that it was the financial system, and especially the central banks and regulatory bodies that were charged with overseeing and directing the system, which was not merely the source but the cause of the crash and crisis of 2007-09.

 

Furthermore, in this view, the unprecedented and unorthodox policies pursued in recent years have created a façade of recovery, a pretence of a return to good health, whilst in fact the underlying deterioration continues – and may actually be exacerbated by the massive distortions caused by these policies. Specifically, the policy of holding interest rates at or near zero for years on end has created a series of speculative bubbles in various financial markets, has punished savers and rewarded borrowers – especially borrowers who use the funds obtained for financial activity – and has driven pension systems much deeper into actuarial deficits (meaning that they will be unable to meet their future obligations.

To the growing band of economists, analysts and commentators who reject the idea that central bankers are agents of salvation, worthy of being adulated and deserving of honour and esteem, the idea of granting awards to them is both ludicrous and tragic at once.

An excellent example of this phenomenon in action was the recent awarding, by the Financial Times’ specialist publication The Banker, of the ‘Central Banker of the Year’ award to the new head of the Bank of Japan, Haruhiko Kuroda, who took office in March 2013. Kuroda was appointed by Prime Minister Shinzo Abe with the clear and unequivocal goal of creating inflation, so as to extricate Japan from the deflationary spiral it has been in for most of the past 15 years.

 

Kuroda launched his new policy in April last year, and inflation has since turned positive, to the tune of about 1% per annum, whilst economic growth has jumped. He is therefore being hailed at home and abroad as a stunning success. But not everyone agrees. Some people – the kind of curmudgeons noted above – think that merely  printing vast amounts of money is not clever. In the especially dire condition which Japan’s economy is in, the Abe/ Kuroda policy is a lose/lose situation.

That’s because if it succeeds in meeting its declared goal, of pushing inflation up to 2%, it is virtually impossible that anyone – even Japanese investors – will continue buying Japanese government bonds offering a yield of well below 1%. In other words, interest rates will rise. Given that the Japanese government has net debt of some 220% of GDP, any rise in interest rates is going to cost it dearly. In fact, since it already spends about one-quarter of its total tax receipts on interest on its debt – despite interest rates being amazingly low in Japan – a significant rise in rates will pose a threat to the solvency of the Japanese government.

Meanwhile, the Japanese currency has already fallen by some 40% in the period since the new policy began to take shape and be implemented. If it is maintained, the devaluation will continue – and Japanese household income will erode, whilst other countries, such as China and Japan, will seek to retaliate against this Japanese economic warfare.

 

For his contribution to destroying his country’s currency, bankrupting its government, and causing severe damage to its relations with all its neighbours, Mr Kuroda is considered a great success and worthy of the title ‘Central Bank Governor of the Year’.