Whilst we have been preoccupied by the gripping drama of our referendum on the future of our country, there has been plenty going on elsewhere in the world which has led to stock market declines and worries about the economic future.
Investors and commentators have taken to doubting the power of monetary policy to deliver growth, a bit of inflation and better returns for savers. The large experiments with creating additional money and buying bonds have not succeeded in lifting the inflation rate in either Japan or the Euro area. The growth rates of the US, the Euro area, Japan and China all seem to be slowing. As some Central banks push deeper into negative interest rate territory, some wonder if all this has gone too far. Negative rates make it difficult for banks to make money and therefore to lend more. They also give the impression of panic by the authorities which does not help confidence. Meanwhile plunging oil and commodity prices in recent months have wiped billions off share valuations of those sectors, and have worried people about the state of the banks that has lent the money to those industries.
Some have returned to their beliefs in bigger fiscal stimulus. They are asking governments to go easy on deficit reduction, spend more, and borrow it at cheap rates. Some want the monetary experiments to be taken further, recommending more quantitative easing, further cuts in rates, and even so called helicopter money, where the authorities print money to spend.
To get back to normal the authorities have to do something they clearly do not want to do. They have to allow banks to make reasonable returns, and allow them to lend more on their current capital base. If the authorities persist in preventing the banks from lending to reasonable prospects, or if their fines, taxes and interest rates prevent banks making profits, the banks and the economies they seek to finance will remain crippled. If the European Central Bank wants banks to hold more capital and to take a tougher line on the value of loans it will hold back economic growth. When a Central bank does that, and creates new money at the same time, it is like trying to drive a car with one foot hard down on the accelerator(money creation) and the other hard down on the brake (cash and capital controls). No wonder there is not much growth.