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This
is potentially dangerous for the world economy because after
nearly a decade of unprecedented stimulus to revive the global
economy and financial system, the effectiveness of central
banks' policy measures is fading.
The slowdown in the velocity of money is being blamed on a range
of factors including the large amount of debt still in the
system, banks sinking into a liquidity trap and the
unwillingness of households, businesses and banks themselves to
take risks.
Rectifying this will require a mix of growth-friendly measures
in fiscal policy, regulation, and structural reforms, analysts
say. It won't be a quick or easy fix.
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Analysis from Morgan Stanley shows that the amount of cash in
the G4 economies of the United States, the euro zone, Japan and
Britain has expanded up to five-fold since 2008 thanks to
unprecedented stimulus from these central banks.
The money base includes currency in circulation, commercial bank
deposits at the central banks and central bank liabilities,
Morgan Stanley said.
Yet only U.S. bank lending is higher now than it was then.
Lending is barely higher in Japan, steady in the euro zone and
notably lower in Britain.
Mohamed El-Erian, chief economic adviser at Allianz, and former
CEO and co-CIO at bond fund Pimco, reckons central banks'
firepower is almost exhausted, and the responsibility for
securing a stable and thriving economy must be shared broadly.
"Central banks have not run out of instruments, they're running
out of effective instruments. But it's going to take a shift in
the economic paradigm, and that's not going to happen on its
own," he said.
(Reporting by Jamie McGeever; Graphic by Vincent Flasseur;
Editing by Catherine Evans)
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