UPDATE 1-High liquidity mustn't create bubbles, Schaeuble says

Wed Jan 8, 2014 9:20am EST

* Economists worry liquidity could stoke inflation, bubbles

* Schaeuble says German growth is stable, based on domestic demand

* U.S. says Germany could do more to boost domestic demand

By Alexandra Hudson and Jason Lange

BERLIN, Jan 8 (Reuters) - Policymakers must closely watch ultra-high liquidity provided by the world's big central banks to ensure no new asset bubbles form, German Finance Minister Wolfgang Schaeuble said on Wednesday, reiterating a long-standing warning.

"We must keep a watch on liquidity levels to ensure new bubbles aren't being created," Schaeuble said at a news conference with visiting U.S. Treasury Secretary Jack Lew.

"We share a responsibility to do everything to prevent new crises and new bubbles from emerging," he said, adding however that politicians should not tell central banks how to do their jobs.

Many economists worry that unprecedented levels of liquidity risk stoking inflation or asset bubbles. Janet Yellen, incoming U.S. Federal Reserve chair, has consistently shot down those concerns.

Central banks such as the Fed, the European Central Bank and the Bank of England have cut interest rates to record lows as part of their efforts to encourage a durable recovery.

They have also put in place bond-purchasing programmes to get funds back into the economy. The Fed alone has quadrupled its balance sheet to about $4 trillion through three massive bond-buying programmes. Economists expect the ECB may launch a new bond-buying programme in coming months.

But Schaeuble's comments come at a time when the Fed is expected to start tapering and excess liquidity in the euro zone financial system is likely to nearly halve this week as banks take up less ECB funds.

GROWTH BALANCED?

Schaeuble said Germany's economic growth was stable and fuelled by domestic demand. His country has come under fire - notably from the United States - for relying too heavily on exports and thereby hampering euro zone growth.

In October, the U.S. Treasury said in a report to Congress that Germany wasn't doing enough to spur its domestic economy, and that its dependence on exports was putting downward pressure on wages and prices around the world.

"In Germany, we are seeing good economic progress. We have some of the most stable growth conditions supported by domestic demand," Schaeuble said.

"If you exclude Germany the euro zone would have a deficit.... within the euro zone we do not have a German surplus, so overall we do make our contribution," he added.

Lew, sitting next to Schaeuble, acknowledged Germany had made progress on balancing fiscal consolidation with economic growth but said more could be done.

"Over the course of this past year, I think we've seen very constructive movement to get the balance right between fiscal consolidation and growth," Lew said, but added:

"We have made very clear that we think that more domestic demand and investment would be a good thing. We continue to believe that policies that promote domestic demand would be good for the German economy."

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Comments (1)
Isn’t excessive liquidity always the primary source of bubbles? Capitalism is by its very nature irregular in its liquidity because of the elements that drive its propagation.

Jan 09, 2014 12:19am EST  --  Report as abuse
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