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You ask me what’s going to happen? Hell, I don’t know what’s going to happen. I regard it all as very weird. If interest rates go to zero and all the governments in the world print money like crazy and prices go down – of course I’m confused.  – Charlie Munger

Can any/all of these policy alternatives save the “system”? We shall find out, but current evidence of the past 7 years’ experience would support only a D+ report card grade. Barely passing. – Bill Gross


What do most smart people do when they are confused?  They don’t admit it. Central bankers are no exceptions.

When the economy crashed in 2008, they thought pumping money into banks through quantitative easing (QE) will fuel growth. But the money has not flowed through to businesses. Economic growth & prosperity depends on businesses borrowing money to expand & grow. Either businesses are hesitant to grow or banks have not been able to attract borrowers. The next tool the bankers used was reduced interest rates to attract borrowers. Interest rates went down to zero and even became negative in some countries. Businesses are still coy. Most developed economies are still weak. Low growth, high unemployment, & uncertainty are rampant.

An amusing thought experiment is to handover money directly to masses who would spend the money buying goods & services, thereby spurring economic growth. Dropping money from helicopters or crediting people’s bank accounts directly may or may not make them spend the money. In uncertain times, people may choose to save the money.

Alternatively, governments could choose to spend money on huge infrastructure and social projects, thereby catalyzing the flow of money and income to corporates and citizens, who would then buy more goods & services energizing the economy. This has been done before, more recently in Japan when its economy crashed in 1990 after a debt-fueled real estate boom. After the crash, Japanese businesses were more keen to reduce their debt rather than borrow more money and pursue growth. The Japanese government had to step in with huge public expenditure on infrastructure projects to keep the economy humming. Despite all efforts, the Japanese economy has still not recovered.

Recovery after a crash is complex, uncertain and may take a very long time. A more globalized & interconnected world with many disparate systems & approaches in each country can lead to bigger crashes. Bigger the crash, more complex is the recovery. Confused central bankers, politicians & businessmen make the recovery more volatile. A complex globally interlinked economy is not an easy animal to understand and domesticate.

In the meantime, as always, smart money will flow towards novelty, quality & safety. Innovative businesses & people may thrive. Quality businesses may survive. The few emerging economies showing signs of growth & safety, like China & India, may attract investments & grow further.

But the outlook remains unusually uncertain.


  1. The only game in town by Mohamed A El-Erian
  2. The escape from balance sheet recession by Richard Koo
  3. The age of stagnation by Satyajit Das