New Abnormal Means Relying on Central Banks for Growth

The “new normal” may be new. It’s hardly normal.

The “new abnormal” would be more apt, according to reports published this month by Ed Yardeni of Yardeni Research Inc. in New York and ING Bank NV’s Mark Cliffe in London.

“Dictionaries define ‘normal’ as regular, usual, healthy, natural, orderly, ordinary, rational,” Cliffe said Nov. 7. “It is hard to use those words to describe the current performance of the world economy and financial markets.”

Among signs of irregularity since Pacific Investment Management Co. popularized the expression “new normal” in 2009 to describe an environment of below-average economic growth: Central banks are still deploying near-zero interest rates or quantitative easing six years after the financial crisis, yet output, inflation, business investment and wages remain mostly subpar.

In financial markets, equities are hitting new highs as bond yields probe new lows. Even as the U.S. shows signs of strength, commodities are slumping.

The lesson for Yardeni is that by running to the rescue every time asset prices swooned in the past two decades, central bankers’ prescriptions distorted economies.

“If a central bank moderates recessions, then speculative excesses are likely to build up much more during the booms and never get fully cleaned out,” Yardeni, a former chief economist at Deutsche Bank AG, said in a Nov. 19 report. “So each financial crisis gets progressively worse than the previous one, forcing the central bank to provide even more easy money to avert a financial meltdown.”

Watching Markets

Cliffe at ING is less willing than Yardeni to lambaste central banks, noting it’s hard to say how bad a recession may have occurred without their aid. Still, he agrees that policy makers now find themselves having to keep an eye on markets as much as the economies when setting policy.

Witness how quick officials such as St. Louis Federal Reserve President Jim Bullard and Bank of Japan Governor Haruhiko Kuroda were last month to soothe anxious investors. The risk is that an era of monetary interventions leaves markets primed for volatility when policy makers do step toward the exit.

Officials “are clearly concerned that a sharp fall in asset prices might derail their efforts to foster economic growth,” said Cliffe. “That leaves ample scope for policy errors and sudden investor panics.”

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