Richard Barley had a piece in Monday’s The Wall Street Journal concerning the confidence gap that’s growing between Central Banks’ unconventional policies and the realities of the market place and the economy that underlies both. He closed his piece with this:
But there are more valid worries. One is that while central bank efforts are proving enough to keep the economic show on the road, they aren’t doing more than that; the persistent downgrading of growth expectations and the constant refrain from policy makers themselves for politicians to take measures to boost growth sustainably are testament to that.
But, meanwhile, they are producing asset-price inflation. The fear is that the gap between asset prices and reality will close sharply as markets correct. It isn’t clear what might cause that or when: markets are still dancing to the tunes being played by central banks.
Unconventional policy in the immediate wake of the financial crisis undoubtedly helped to boost confidence in markets. But the longer unconventional policy persists, the less confidence it inspires.
That last paragraph introduces the point I want to make.
Unconventional policy helped in the immediate wake because it was new, and so novel, and came in the face of a strong and already discouraging economic dislocation—much like Keynesian stimulus is supposed to help in such a circumstance when it’s new, and so novel (I won’t here get into whether Keynesian stimuli actually do help in their necessarily zero-sum applications). However, when the policy is no longer novel, when it becomes the steady-state condition, it loses its stimulative capacity—whether the policy is unconventional or Keynesian stimulus.