Mission impossible.

• Author: Smick, David M.
• Position: FROM THE FOUNDER

Lately it seems the industrialized world's central bankers are like the actors in the movie Mission Impossible. Officials are being unfairly asked to do the miraculous in covering up for governments' lack of fiscal and regulatory common sense. Central bank balance sheets, quantitative easing, and zero interest rates have become the new policy tools of choice to try to fix the global economy. The mission may be impossible. The purpose of these new monetary tools is to try to keep long-term interest rates low. The economy's "animal spirits" will then ignite mad increase domestic demand. Picture the What-a-Mole carnival game. The participants (the central bankers) wield large wooden mallets mad smash down (through government bond purchases) on the heads of artificial moles (bond traders in short government bond positions) who continuously pop up out of the holes in a flat playing surface. The central bankers' message to the moles: "Betting on higher interest rates could be dangerous to your financial health."

Yet this great monetary hammering and record low rates sadly have failed to reverse the stagnation in wage and salary income. Global demand has actually sunk during this period of striking monetary policy creativity. The global economy has hit stall speed. Public debt keeps expanding.

One reason for disappointment is that government borrowing has been accompanied by a lack of private borrowing. People mad companies instead are engaged in the tough job of paying down debt. With the monetary, lending function not working, central bankers' last hope is that quantitative easing rallies equity markets, creating a wealth effect that spurs demand. Yet any wealth effect by definition will focus on more affluent consumers, mad at this point how many toasters, automobiles, and flat-screen televisions can Mark Zuckerberg buy?

Central banks must do more, critics demand. But as John Berry argues in this issue (p. 8), it is not clear the central bankers have effective enough tools. Bernard Connolly suggests (p. 12) that the world has become "dynamically inefficient" as real interest rates are lower than the expected real trend growth. Expectations of future demand are overly optimistic. Economist Ronald McKinnon adds (p. 16) that zero interest rate policies have destroyed the financial intermediation process, and make escape from today's liquidity trap impossible.

It is not just that quantitative easing may be losing effectiveness; it is that the...