Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says
Policy makers steering the global economy have pumped the financial system with so much liquidity that any exit risks popping potential asset bubbles or stunting a recovery, Danish central bank Governor Lars Rohde said.
“The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation,” Rohde, 59, said in an April 5 interview from his office in Copenhagen. Though there are no current signs of consumer price inflation “there is inflation, perhaps a bubble, in some asset classes,” he said. “Equities (MXWO) are trading close to all-time highs. Segments of property markets across the globe, for example London, also display symptoms of this. How do we exit this without killing whatever nascent recovery there might be at that time?”
The warning from the head of Denmark’s central bank, which has kept its deposit rate below zero since July, comes as policy makers in Japan, the euro area and the U.S. deliver unprecedented monetary stimulus to drag the global economy out of the worst crisis since the Great Depression. Easy money has fueled equity prices, helping send the Standard & Poor’s 500 Index to an all-time high on April 2. The yield on Japan’s benchmark 10-year bond hit its lowest on record last week.
“We’re in a landscape where we’ve never been before, with regard to extreme monetary accommodation over a very, very long period of time,” said Rohde, who took over as the head of Denmark’s central bank in February. “What does that end up doing to a society? It’s been a necessary policy, but I have my concerns about what the long-term risks are.”
The prospect of a reversal of crisis policies looks remote as the euro area bails out a fifth nation and Japan’s central bank embarks on a new phase of monetary easing, doubling its monetary base as it targets faster price growth. The developed world’s record-low interest rates are giving a false sense of affordability to projects and businesses that would probably fail in a more normal monetary climate, Rohde said.
“The risk is that we’ll have companies that are only able to survive because interest rates are extremely low. But these are companies that ought to have gone down,” he said. “We’re seeing projects going through that wouldn’t be sustainable at higher interest rates. We’re seeing zombie companies and zombie economies because of the extremely low interest rates.”
So far the crisis policies deployed by central banks since 2008 have had limited success in generating any lasting recovery. The 17-nation euro area will contract 0.3 percent this year after shrinking 0.6 percent in 2012, the European Commission estimates. Both the U.S. and Japan will expand less than 2 percent this year, the commission said Feb. 22.
The effect of crisis measures such as quantitative easing is also fading, according to Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development.
“In order to get the productivity and competitiveness you have to go to the structural policies. We ran out of room on the monetary policy side,” Gurria said in Oslo today. “We are now at zero interest rates, or very close to it. The QEI, II and III and all those are clearly moving into what I would call diminishing returns.”
The U.S. Federal Reserve has held its benchmark rate close to zero since 2008, while Japan’s main rate is between zero and 0.1 percent. The Frankfurt-based European Central Bank has held its policy rate at 0.75 percent since July in an effort to ease the region’s debt crisis. All three have supplemented policy rate setting with some form of bond-purchase program.
“If we exit this regime too fast, too abruptly, then there are several corners of asset markets that could start showing signs of a bubble in the process of bursting,” Rohde said.
In Denmark, where monetary policy defends the krone’s peg to the euro, the central bank raised rates in January. That followed signs Europe might be able to stem its debt crisis, prompting investors temporarily to turn their backs on haven markets. The Danish central bank’s deposit rate is minus 0.1 percent and the benchmark lending rate is 0.3 percent.
Denmark, which boasts a debt load that’s half the euro zone’s average, probably won’t raise rates again for at least another three months, according to economists at Danske Bank A/S, Jyske Bank A/S, Nordea Bank AB and Svenska Handelsbanken AB.
“The krone is stable against the euro,” Rohde said. “It’s hard to claim that the krone’s exchange rate is undervalued.”
Though the central bank supports euro adoption, a referendum is unlikely to be “an option for a considerable time to come,” Rohde said in an interview last month. Most Danes would vote against a currency switch, a Danske Bank A/S poll conducted by Statistics Danmark showed in March.
“I believe Denmark should one day be a member of the euro,” Rohde said in the April 5 interview. “Is it realistic in the foreseeable future? For political reasons, the answer is a resounding no.”
Rohde also argues that the “euro is actually in balance against the dollar.” There’s “nothing that indicates the euro isn’t within a likely level of where it ought to be. The exchange rate has fluctuated a bit but the euro’s not fundamentally over- or undervalued,” he said.
Excessive monetary easing isn’t evidence of central bankers trying to manipulate their currencies, Rohde said. Policies being deployed target domestic challenges, he said.
“It does create some unfortunate side-effects, but to talk of a resurgence of competitive devaluations, I don’t see any evidence of this,” he said. “My clear impression is that all talk of currency wars is exaggerated.”
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