REVIEW & OUTLOOK
February 18, 2013, 6:57 p.m. ET
'Loose Talk' and Loose Money
The G-20 concedes that central banks rule the world economy.
This contradiction between economic word and deed shows the degree to which policy makers have defaulted to easy money as the engine of growth. The rest is commentary.
The days before the Moscow meeting were dominated by blustery fears about the "currency war" consequences of money printing in the service of devaluation. Lael Brainard, the U.S. Treasury under secretary for international affairs, gave a speech in Moscow warning against "loose talk about currencies." She seemed to have in mind Japan, whose new prime minister Shinzo Abe has made a weaker yen the explicit centerpiece of his economic policy.
In the diplomatic event, all of that angst went by the wayside. The G-20 communique bowed toward a vow to "refrain from competitive devaluation." But the text also repeated its familiar promise "to move more rapidly toward more market-determined exchange rate systems"—words that essentially mean a hands-off policy on currency values. So Japan can do what it wants on the yen as long as it doesn't cop to it publicly.
That message was also underscored by Federal Reserve Chairman Ben Bernanke, who implicitly endorsed Japan's monetary easing and declared that the U.S. would continue to use "domestic policy tools to advance domestic objectives." When the chief central banker of the world's reserve currency nation announces that he is practicing monetary nationalism, it's hard to blame anyone else for doing the same.
The upshot is that this period of extraordinary monetary easing will continue. Economist Ed Hyman of the ISI Group counts dozens of actions in recent months in what he calls a "huge global easing cycle." The political pressure will now build on the European Central Bank to ease in turn to weaken the euro. South Korea and other countries that are on the receiving end of "hot money" inflows may feel obliged to ease as well to prevent their currencies from rising or to experiment with exchange controls.
This default to monetary policy reflects the overall failure of most of the world's leading economies to pass fiscal and other pro-growth reforms. Japan refuses to join the trans-Pacific trade talks that might make its domestic economy more competitive. The U.S. has imposed a huge tax increase and won't address its fiscal excesses or uncompetitive corporate tax regime. Europe—well, suffice it to say that Silvio Berlusconi is again playing a role in Italian politics and the Socialists are trying to resurrect the ghost of early Mitterrand in France.
So the central bankers are running the world economy, with the encouragement of politicians who are happy to see stock markets and other asset prices continue to rise. Here and there someone will point out the danger of asset bubbles if this continues—ECB President Mario Draghi did it on Monday—but no one wants to be the first to take away the punchbowl. It's still every central bank, and every currency, for itself.