G20 - the talk of exit strategies very uncertain

One of the topics for the G20 meeting agenda will be monetary policy exit strategies. There has been unprecedented stimulus across most central banks. The market is flooded with liquidity through lowering rates and quantitative easing. Not all of this is being used by banks. as measured by the excess reserves in the many countries. If the recovery continues, central banks will have to deal with how to reverse this stimulus. The method will effect inflationary expectations and the whether global growth will continue. Stimulate too long and there will be the potential for inflation. Cut the stimulus too quickly and there will be a reversal of the growth.

The importance of the exit is demonstrated by looking at how the Fed tried to get out of the Great Depression. If the Depression was caused or accentuated by poor monetary policy, it was made even worse because of the exit strategy of 1936. The Fed raised reserve requirements under the mistaken belief that the crisis was over. The result was the recession of 1937. 1937 also was when there was a reversal of fiscal policy but there is little doubt that monetary policy tightening contributed to the decline in 1937.

To say the G20 is interested in an exit strategy is the equivalent of asking what will the Fed do and when will they do it. Governments want answers, but there is little clarity of what will happen and at what time.