Albert Einstein is said to have defined insanity as doing the same thing over and over again and expecting different results. By failing to change their way of thinking since the global financial crisis, the world’s main central banks are proving Einstein right.
Many in the markets worry that central banks are running out of ammunition to boost global growth and generate inflation. They are not. The Bank of Japan’s adoption of negative interest rates, the European Central Bank’s extension of its quantitative easing (QE) programme and the Federal Reserve’s decision to slow the normalisation of US interest rates show that policymakers can still draw on plenty of firepower.
So it is not that central banks are not doing enough. It is that their policies are misguided and are hampering global rebalancing. In particular, investors should be worried that policymakers have failed to learn three main lessons from the subpar performance of the global economy since the 2008-09 crisis.
