"A period in which aggregate demand was stimulated with an agile supply response that did not affect prices, or did so in a subdued way. I think that this model is difficult to sustain as it was related to novel factors at the time, such as trade openness, geopolitical stability and the entry into the global economy of emerging countries with large populations. All this contributed to increases in aggregate demand which found an efficient response on the supply side, without putting pressure on wages and prices. Now aggregate supply conditions have become more complicated so that changes in aggregate demand will have a greater impact on prices.”
Q- In Jackson Hole you referred to productivity as a concept that needs to be brought back into the economic and political debate.
A- We lived through many years during which the economy could be stimulated with aggregate demand actions, with accommodative and stimulative monetary and fiscal policies. But this is an incomplete view. Growth does not depend only on monetary and fiscal policies, but rather on how efficient productive processes are, on applying the best technology, on functioning markets, both labour markets and markets for products and services, on openness to competition in trade… I think the debate on growth has been limited. In economics we understand how aggregate demand works but not so much aggregate supply, which is a black box. There is no debate about how to make it more effective. Before the pandemic when the geopolitical context was more benign, we assumed the desirability of competition and trade openness, how important it is to invest in human capital. That debate is now absent and we need to return to it in order to put a measure such as productivity in value. It is not easy, that is why we resort to the easiest, to monetary and fiscal policies with short and medium-term effects. But central banks are at the limit on that path and for the future we cannot resort to more monetary stimulus to growth without addressing productivity in all its complexity and depth. This is a political issue, which requires the intervention of other actors, trade issues, supply dynamics….
Q- Parallel to the effort to supervise and oversee the financial system, new financial market actors, what we call shadow finance, have grown….
A- As the BIS has noted, non-bank financial markets have grown exponentially and disorderly. Wholesale market operations have multiplied, in many cases very complex, speculative and lacking in transparency. There are regulated activities such as insurance, stock markets… that are controlled, but there are other sectors that have expanded greatly, stimulated by low interest rates that have led to the assumption of a great deal of risk. The problem is that this non-bank financial innovation operates with high leverage and balance sheet imbalances which affect their liquidity. In times of turbulence, markets are disrupted in their operational functioning. We have seen this in several episodes, for example with COVID, which disrupt some markets and cause very serious imbalances. This has forced central banks to act as market-makers of last resort to avoid disasters. Excessive leverage can lead to massive losses. This has been the case with some cybercurrencies or cryptocurrencies, which operate without a regulatory framework, with too much leverage and too little transparency. The good thing is that a barrier has been erected between the traditional markets and the others, avoiding systemic problems.
Q- I am wary of cryptocurrencies or digital money, a subject on which the BIS has devoted several papers. What do you see as the future of digital money?
A- In financial history we know of many attempts to create private money. When money is issued for profit, the story usually ends badly. And I think there is something of that behind cryptocurrencies. First comes the romantic idea of creating private, decentralised money, without the intervention of central authorities. But there is a fiction about decentralisation. It is apparent money that does not meet the three requirements of being a unit of account, a store of value and a medium of exchange. What has happened is that these creations have been accompanied by instability that complicates the classical function of money and are affected by dangerous speculation. In 2018 I said that bitcoin was a Ponzi game, a speculative bubble and an ecological disaster. And the prediction is coming true.