Satyajit Das: Ditching expansionist policies is like trying to escape from Hotel California

Das Capital: It's like listening to Monty Python's mortally wounded Black Knight

The official policy throughout the world is "extend and pretend". Rather than deal with the fundamental issues, policy makers have adopted an expedient mix of expansionary policies. Public spending has been used to boost demand. Low or zero interest-rate policies ("ZIRP) and quantitative easing ("QE") have been used to make high levels of debt more manageable. Central banks increasingly finance governments through the purchase of sovereign debt. Currency devaluation is used to increase competitiveness and also to reduce the value of sovereign debt held by foreign investors.

Unfortunately, these policies have not created the strong economic growth, or the inflation, needed to address the problems exposed by the crisis. Instead, the policies intended to deal with the issues have spawned toxic problems of their own.

The effect of ZIRP, QE and budget deficits on the real economy (activity, employment, investment) has been limited. Instead, the policies have set off rapid and destabilising asset price rises.

ZIRP and QE have encouraged a switch to risky assets, such as high yield and emerging market bonds, to generate some returns. Mis-pricing of risks is now increasingly evident. Aggressive lending, inadequate covenants and use of discredited financial techniques (such as collateralised debt obligations) have re-emerged, in some cases almost reaching pre-crisis levels.

Commenting on the increased investment by banks of structured securities (which caused big problems in 2007/2008), Adam Ashcraft, head of credit risk management at Federal Reserve Bank of New York, observed: "We're not learning the lessons we need to learn. We haven't done anything meaningful to prevent the securitisation market from doing what it just did."

Policy settings seem curiously similar to those which contributed to the global financial crisis in the first place. In many markets, such as the US and UK, governments continue to stimulate the housing market, despite the fact that this was one of sectors that created problems during the crisis.

Policy makers seem to have forgotten the sage old advice: repeating the same thing over and over and expecting a different result is indicative of insanity.

Official policies are complicated by the Hotel California problem – you can check out any time you like, but you can never leave! As Ben Bernanke, the outgoing US Federal Reserve Chairman, discovered with his "taper" talk, quitting the present expansionary monetary policy may be difficult or even impossible without disrupting the market, which could truncate the weak real economy recovery.

In the coming months and years, a number of issues will increasingly dominate discourse.

First, it is unlikely that economic growth will reach the levels needed to power the global economy back to health, at least in the near future.

Second, inflation levels will remain low with disinflation or deflation an ever-present risk.

Third, sovereign debt problems in developed countries, as well as in a number of emerging markets, will remain an important concern.

Fourth, problems in emerging markets will continue. Overall growth will moderate and several countries may experience debt crises of different magnitudes. This will drag down global growth and affect the chances of recovery in developed countries.

Fifth, the impotence of policy makers and the inadequacies of available policy options will become increasingly evident. Policy makers quietly talk about major "macroeconomic failures". It is oddly similar to Monty Python's search for the Holy Grail, in which a defeated, limbless and mortally wounded Black Knight refuses to concede defeat, threatening to bleed on the victor.

Sixth, the economic problems will increasingly manifest themselves in social and political problems, both at home and internationally.

High levels of unemployment or under-employment, rising income inequality and the state's inability to provide the level of services that people expect will fuel increased social discontent. It will also fuel political extremism, as is already evident in the rise of parties of the far right and far left.

Interestingly, in Italy's "pitchfork" protests, the police took off their helmets to signal their solidarity with and support for the protesters.

Disparities in economic activity levels between countries will feed distrust and beggar-thy-neighbour policies. Limited growth will fuel economic isolationism and nationalism. Recent territorial disputes attest to the battle for resource security, but also to the political advantage of deflecting attention from domestic problems and making a naked appeal to nationalism.

Other issues, such as climate change or environmental degradation, the management of non-renewable resources and geopolitical instability (the Arab spring seems to have been followed directly by the Arab winter without ever seeing summer or autumn), remain ever present.

There is a growing gap between financial markets and real economic activity, between the 1 per cent who continue to gain in the current environment and the 99 per cent whose fortunes have declined, and between the promises of policy makers and the economic reality. This gap must close at some time. Unless real economic activity picks up, financial markets and prices will have to adjust, perhaps sharply, in the feared "crash".

Satyajit Das is a former banker and author of 'Extreme Money' and 'Traders, Guns & Money'

News
Netherlands' goalkeeper Tim Krul fails to make a save from Costa Rica's midfielder Celso Borges during a penalty shoot-out in the quarter-final between Netherlands and Costa Rica during the 2014 FIFA World Cup
newsGoalkeepers suffer from 'gambler’s fallacy' during shoot-outs
News
people
Travel
travel
Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
artCultural relations between Sydney and Melbourne soured by row over milk crate art instillation
PROMOTED VIDEO
Arts and Entertainment
Adèle Exarchopoulos and Léa Seydoux play teeneage lovers in the French erotic drama 'Blue Is The Warmest Colour' - The survey found four times as many women admitting to same-sex experiences than 20 years ago
arts + entsBlue Is The Warmest Colour, Bojack Horseman and Hobbit on the way
News
Two giraffes pictured on Garsfontein Road, Centurion, South Africa.
i100
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
News
Kenny Ireland, pictured in 2010.
peopleBenidorm, actor was just 68
News
i100
Arts and Entertainment
arts + ents
News
people
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Morrissey pictured in 2013
people
News
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features playground gun massacre
News
i100
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Training Programme Manager (Learning and Development)-London

£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices