In one of his last interviews as the governor of the Bank of England, Mark Carney warned that the ammunition box that central banks need to fight the next downturn was next to empty and the world economy could be heading for a ‘liquidity trap’ (where monetary policy loses all effectiveness). In the interview in the Financial Times, Carney states ‘It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time’. Carney believes that the next time the global economy looks like it’s about to hit the rocks, monetary tools alone will not be enough to weather the storm. On this Carney is in line with other central bankers in believing that it’s also the government’s job in helping to tackle any downturn. They could enhance the effectiveness of central bank policy with such things as an increase in public spending or tax cuts, however, ‘it’s not central banker’s job to do fiscal policy’, he warned.
We have long believed that global central bankers looked at the Japanese lost decades ‘Japanification’ and were (overly?) confident that it could or would not happen in their jurisdiction, so avoiding the same mistakes. It seems remarkable that only now do we have, either exiting central bankers, Carney and Draghi, or one of their replacements Christine Lagarde, admitting that after throwing the kitchen sink at their policies (largely without success), they now have increasing concerns about how to respond to the next big downturn.
One area that Carney was optimistic about was the City of London’s post-Brexit prospects. In particular, he thinks the City may yield massive dividends from its ability to help finance and indeed accelerate action on climate change. ‘This happens to be a huge commercial opportunity for the City of London and the UK financial sector’, he said, although he advised the UK government to avoid aligning financial regulations in the hope of getting better trade terms from Brexit. ‘It is not desirable at all to align our approaches, to tie our hands and to outsource regulation and effective supervision of the world’s leading complex financial system to another jurisdiction’, he said.
Also, on this day in 1835, the then President Andrew Jackson achieved his goal of entirely paying off the US’s national debt. In campaigning for re-election in 1832, amongst other things Jackson vetoed the recharter of the national bank whilst calling debt ‘black magic’ and a ‘moral failing’. Once elected on the back of his ‘Where there's a will, there's a way’ slogan, he also vetoed a number of spending bills, ending projects that would have expanded nationwide infrastructure. He sold off vast amounts of government land in the West, thus being able to pay off the national debt in 1835. Not that it did the US economy any good, as by 1837 the country would be in a panic and headed into one of its worst depressions ever.