The era of monetarism is over

  Although the latest World Economic Outlook published by the International Monetary Fund (IMF) shows that economic activity this year has slowed to its lowest level since 2009, the global growth rate is forecast to reach 3%, which is still far higher than the past recession, and is in absolute contrast with the world The good economic conditions in most regions are consistent-this is not a bad thing for the 11th year of continued global expansion. The IMF predicts that the growth rate will accelerate to 3.4% next year. This result is very close to the 3.6% growth forecast under the “long-term sustainable development trend of the world economy”.
  One might think that the IMF’s predictions about the rebound in growth rates next year are of limited credibility, because all economic models are designed in such a way that they tend to return to long-term average trends. But the 2019 figures are very different and more credible. As of this stage of this year, the 2019 “forecast” basically reflects the data that has been collected.
  Despite the outbreak of the trade war, neither the United States nor China has experienced any real economic recession: since October last year, the growth rates of both countries have been reduced by a statistically insignificant 0.1%. Japan’s economic situation has not changed, and the rest of Asia has only shown a slight slowdown. Europe is the main problem area of ​​the world economy this year. The growth forecast of the euro area is reduced from 1.9% to 1.2%, a decline of more than 1/3, and Germany is directly lowered from 1.9% to 0.5% near the recession.
  The bad news is that, even if it is not in 2020 or 2021, the current relatively mild state of the world economy will really deteriorate at some point. By then, central bankers will have to admit that they can no longer manage the business cycle and mild economic downturn. The less bad news is that the vast majority of policy makers now recognize that there are other tools that are more effective and that they are prevented from being widely used by outdated political ideologies and economic dogmas.
  The election of Margaret Thatcher in 1979 confirms the superiority of various forms of monetarism; 40 years later, the pendulum of academia finally began to return to Keynes’s point of view, that is, fiscal policy—that is, about government spending, taxes And lending decisions—the most effective tools for managing demand and stabilizing the economic cycle. Central bank governors were the first to recognize that monetary policy has reached its limits, while many politicians and economists still deny the current paradigm change.
  Milton Friedman’s famous saying “Inflation is a monetary phenomenon anytime, anywhere” has been refuted by empirical research. But the more serious challenge is that there may be no relationship between currency expansion and inflation. To this day, this is still an academic taboo. Although central banks in various countries have issued previously unimaginable amounts of new currencies, they have not had any inflationary consequences.
  Even more lasting are the most important negative bans of monetaryism: that fiscal policy cannot stimulate economic growth, because increased government spending has a crowding out effect on private investment, and an increase in public borrowing is equivalent to a tax increase. Facts have proven that various theories that government borrowing will increase interest rates, inflation expectations, or future taxes, and thus make fiscal policy “ineffective”, are all wrong.
  Over the past 10-15 years, all advanced economies have significantly increased public borrowing and liabilities. But instead of panicking inflation, investors did not punish this so-called profligacy by demanding higher risk premiums. Instead, they allowed government interest rates to reach historical lows. In many countries, they even accept determined losses through negative interest rates. However, especially in Europe, the notion that fiscal expansion is ineffective or irresponsible, so that monetary policy should continue to be the main management tool of the macroeconomics is still prevailing.
  This year, an important event of the IMF’s annual meeting is that this anti-Keynesian bias has completely disappeared from the central bank governor. The key content of the keynote address of IMF’s new president, Kristalina Georgyeva, called for “fiscal policy to play a more central role.”
  In short, central bankers and senior economic officials now almost agree that monetary policy has reached its limit and that fiscal policy should resume its role of managing the business cycle and supporting the main tools of economic growth. But many politicians, especially European politicians, still refuse to acknowledge that the era of monetarism is over and that “Keynesian demand management” is the only option. We hope that things will change before the next recession.