Should we be imitating the US, Europe and Japan?

The US central bank's "Federal Open Market Committee (FOMC) lowered its benchmark funds rate by 25 basis points to a range of 1.5% to 1.75%" yesterday, but signaled an end to its policy of easing monetary policy unless there are strong indications in the economy. "The decision comes the same day that the government reported GDP growth of 1.9% that, while reflecting a deceleration, was above Wall Street's estimates for 1.6%." Job gains remain at 109,000 which will keep unemployment rate at 3.5%, according to the Atlanta Fed. The International Monetary Fund (IMF) predicts that global growth this year will be the softest since 2008-09 at 3%. "The IMF's new boss, Kristalina Georgieva, sees a 'serious risk' the slowdown will spread", while "$14 trillion of bonds are yielding negative rates. By contrast, equity investors have sent the MSCI World Index up by 14% this year". "Federal Reserve governors say rate cuts are needed to keep the slowdown from spilling into the United States, and to prevent doggedly low inflation from sliding into outright deflation," wrote Ruchir Sharma. Governments and central banks are terrified of deflation, when people postpone their purchases, expecting prices to fall further and result in a collapse in demand. "Japan has been known globally as an economy struggling to overcome longstanding deflation and deflationary mindsets since the late 1990s," wrote Prof Sayuri Shirai. Strangely, inflation expectations of Japanese households "are always positive and far exceed the rate of change in the consumer price index even in a deflationary phase". Similar to India, where a survey by the Reserve Bank (RBI) showed "inflation expectations of households hardened to 8.0 percent in the September 2019", even when retail inflation for August came in at 3.99%. The RBI has been on a rate cutting spree this year, having cut rates 5 times to its lowest level since 2010 at 5.15%. "But with credit already dirt cheap, more cuts could bring on the kind of debt fueled market collapse that preceded the downturn not only in Japan after 1990, but in Asia after 1998 and across the world after 2008," wrote Sharma. "The side effects and after-effects of unconventional monetary policy post 2008 have been several, and they vastly overshadow the feeble economic recovery," wrote Prof VA Nageswaran. "They include income inequality and wealth concentration in may countries; asset bubbles in stock markets; an unsustainable boom in private equity and valuations of technology startups with no sign of profitability over the horizon." When conventional monetary policy is not working it is time for crackpot Modern Monetary Theory which insists that, "In times of recession, deficit spending should be done until full employment is achieved, and such spending should be paid for by printing currency," wrote Ajit Ranade. With our fiscal deficit already "85% de facto monetized" he warns against a policy response of "Whatever it takes". Trouble is, we don't have what it takes but are deluded that we do. Stock markets are at record highs. But temptation hard to resist.