Central banks run out of road

Last weekend central bankers gathered for their annual symposium in Jackson Hole, 7,000 feet up in the mountains of Wyoming. Many people wish they'd never come back down, says The Economist. Eight years after the crisis, the economic recovery has yet to lift off properly, and central banks are looking more clueless and desperate than ever.

After injecting printed money into the economy by buying bonds, central banks have embarked on more extreme policies. Negative interest rates now apply in countries comprising a quarter of the world economy, says Liam Halligan in The Spectator. Private-sector banks in these countries now have to pay the central bank to leave money with them. The hope was that this would spur banks to lend. But it squeezes their profit margins, and banks are loath to pass on the hit because people could withdraw money. Banks and other financial institutions are now considering keeping cash in vaults to avoid charges. "Could any satirist... have envisaged this?" asks The New Statesman's Peter Wilby.

It gets better. Kenneth Rogoff, a former chief economist at the International Monetary Fund, has written a book suggesting abolishing cash to force people to spend in an environment of negative interest rates. We have also been hearing more about helicopter money various forms of permanent monetary stimulus.

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Today's bond purchases under the QE schemes could theoretically be unwound in better times. With money falling from the sky, or student loans being written off, the jolt would be forever. Former Fed chairman Ben Bernanke has just suggested that the Japanese adopt zero-coupon perpetual bonds, which would amount to permanent financing of government spending by the central bank.

Edward Chancellor of Reuters Breakingviews once said that the US should issue zero-coupon perpetual bonds to slash debt service costs on April Fools' day in 2006. The policies under discussion are so weird and unnerving that they are likely to stifle the investment and confidence they are supposed to encourage, says Halligan.

Perhaps that's why central bankers have recently been harking back to an old idea: looser inflation targets, either through explicitly raising them or targeting nominal growth (inflation plus real GDP growth). That could well spook people too: it implies looser monetary policy just as inflation looks set to make a comeback posing a threat to the bond bubble central banks created themselves.