Central banks trapped in Nash equilibrium?

The International Monetary Fund has predicted global growth of 3.5% this year, up from 3.2% last year, but this is as high as it can get, while another financial crisis is brewing up, wrote Prof K Basu. This growth is a result of "unprecedentedly easy monetary policies" by central banks, along with "large scale quantitative easing" which has "injected a massive $32 trillion into the global economy over the last nine years". "But these unconventional policies are turning out to be a classic game-theoretic bad equilibrium: each central bank stands to gain by keeping interest rates low, but, collectively, their approach constitutes a trap." Why? Because if one central bank reduces interest rate it weakens its currency and increases exports but if all of them do it then it increases strain on the banking sector. Investors, looking for higher returns, put money into risky investments: collateralized loan obligations (CLOs) have reached $460 billion, looking like the collateralized debt obligations (CDOs) of 2008. And, finally, people, worrying about their pension schemes, start saving more, which reduces demand. But why are central banks resorting to unconventional policies? With increasing growth and falling unemployment demand should rise, leading to higher inflation, but core inflation has actually fallen in the US, wrote Prof N Roubini. This is because developed economies are experiencing "positive supply shocks" as cheap goods from China and emerging economies keep prices low. In response central banks have kept interest rates low, with increased danger of asset price bubbles. Despite tightening labor markets wages have remained low, especially in Japan where unemployment has fallen to 2.8%. On top of all this the World Bank recently warned that millions of jobs will be lost to automation, which will further reduce bargaining power of labor. The Bank of England cannot explain why wages are not growing despite unemployment falling to a 42-year low of 4.3%, but hopes that they will soon begin to rise. Although the Dow is at record level N Colas does not find this excessive. He thinks that the next recession will be due to technological disruption to jobs. What of India? The Sensex closed at record level yesterday but V Prasad is not worried, even though prices are at 24 times expected earnings per share. There are warnings that emerging markets, including India, are going to be badly affected when developed economies start tightening their lending rates, wrote R Singhal. India has received Rs 12.6 trillion of foreign inflows since 1992-93, which could flow out. The 'Great Unwinding' has begun, wrote M Chakravarty and its effects are yet to be felt. "The invisible hand of the market does not always lead individually self-interested agents to a collectively desirable outcome," wrote Basu. It is the 'Nash equilibrium' of the traveler's dilemma game.