The NYT had a bizarre front page article about the limited effectiveness of monetary policy in the euro zone and elsewhere. The headline of the piece refers to "trillions" of dollars being spent by central banks, a line repeated in the first sentence:

"There are some problems that not even $10 trillion can solve.

"That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises."

In fact, central banks have not spent this money, they have lent this money, mostly by buying government bonds. This matters hugely because lending is a much more indirect way to boost the economy than spending.

Lending by central banks is supposed to boost growth by lowering interest rates. This encourages borrowing in the public and private sectors. This helps to explain the growth in debt in recent years. Rather than indicating a troubling situation, this was actually the point of the policy. Rather than focus on the amount of debt countries, companies, and individuals have incurred, it would be more reasonable to examine their interest burdens. These are mostly quite low.

For example, Japan's interest burden is less than 1.0 percent of GDP in spite of having a debt to GDP ratio of more than 200 percent. This is due to the fact that the interest rate on even its long-term debt is well below 1.0 percent.


Central banks went the route of lending rather than spending because they are generally prohibited from directly spending money. This means that lending is the only route they have for boosting the economy. Governments can spend, but they have chosen to limit their deficits even in the wake of a severe shortfall of aggregate demand because of complaints by deficit hawks like the Bank of International Settlements (BIS), which is cited in the piece. (The BIS has been warning of disaster because of deficits and loose monetary policy for years.)

The piece also presents it as a surprise that monetary policy has not had more of an impact. Many economists predicted the limited impact of monetary policy. However in a situation where deficit hawks paralyzed fiscal policy, monetary policy is the only option available. (Countries can also take steps to reduce supply, for example through promoting work sharing like Germany.)

The piece also includes some bizarre comments. It tells readers:

"Forgiving debts is another way to lighten the dead weight on economies. Writing off debt can hurt banks, but defaults can also clear the system of doubtful loans and accelerate a recovery. Some analysts contend that extinguishing the mortgage debt of households bolstered the United States recovery."

There was no large-scale write-off of mortgage debt in the United States. Proposals like allowing the reduction of principal in bankruptcy were rejected by Congress. 

In another section we are told:

"Yet the Chinese economy is growing much more slowly than it was, say, 10 years ago."

China's economy is currently growing at close to a 7.0 percent annual rate. This is in fact less than the double-digit growth rates of a decade ago, but it is difficult to believe that anyone expected the country to sustain a 10 percent plus growth rate indefinitely.


Note: Typo corrected, thanks to Scott and Robert Salzberg.