The latest OECD Economic Outlook has some advice for the major central banks of the world.
The United States alone is targeted for tighter reins on the money supply.
Although some of the monetary stimulus has been removed, further tightening is needed to contain emerging inflationary pressures, not least because long-term interest rates have remained surprisingly low.For the rest, however, the call is "cheap money, ho!". And the United States cannot fail to reap the cheap money harvest as well.
quantitative easing should continue until inflation is sufficiently high so as to make the risk of renewed deflation negligible.For the European Central Bank,
With inflation declining and a large output gap prevailing in 2006, there is room to easy monetary policy, even though liquidity will have to be withdrawn again once the recovery is firming towards the end of the projection period.For the UK,
Despite the recent pick-up in inflation, weakening growth prospects suggest that monetary tightening will not be required to maintain inflation close to the target.And for Korea,
Monetary policy should maintain its expansionary stance until domestic demand recoversDoes anybody else see the problem in this list of recommendations? First and foremost, it assumes a world of national economies. And yet the evidence of the past three years is that the United States, perhaps uniquely, is able to suck cheap money from all corners of the globe. Events have demonstrated that the Federal Reserve not only has no control over long-term US interest rates -- witness Chairman Greenspan's well-known befuddlement over the behavior of long-term rates -- but precious little control over key short-term interest rates as well. Think of rates on one-year adjustable rate mortgages, two-year Aaa corporate bonds and two-year municipal bonds and you'll see what I mean.
The Fed raising the federal funds rate has no necessary effect on US interest rates in a world awash with cheap money. And following OECD advice, the world will continue to be flooded with cheap money from every quarter save one. Even non-member China promises to be a continual source of funds for the US corporate and housing sectors, so says the OECD:
Going forward, domestic demand may slacken but rapid export growth will limit the slowdown and produce a marked increase in the current account surplus.A surplus ready and able for investment in the US. Put on top of that oil prices staying well above $40/barrel and you have the OPEC countries as well stuffing suitcases with petrodollars for investment into the US treasuries market.
Look for the contradictions to increasingly heighten in the months to come.