Printing self-illusions a risky game (2)

Today, these forecasters expect the advanced economies to grow by 2.2 percent and the emerging world by 5.9 percent in 2014. However, if you take a careful look at their most recent forecasts, you will find that these projections, too, have been downgraded, one quarter after another.

Such deviations are not irregularities or anomalies, but a pattern. During the past four years, the expected growth of the advanced economies has been hugely over-estimated and the impending risks vastly under-estimated. It is the same pattern that has justified the systematic extension of supportive monetary policies in all major advanced economies.

In September 2012, the Fed expanded its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month to hold the federal funds rate near zero until 2015. The goal was to boost growth and reduce unemployment.

In late summer 2012, European Central Bank President Mario Draghi pledged to do "whatever it takes" to preserve the euro. The pledge was followed by the Open Monetary Transactions program to provide liquidity to sovereign debt markets. The goal was to reduce tensions and boost market recovery in the eurozone.

Recently, the stimulus package of the new Japanese government, coupled with the anticipation of aggressive monetary easing and reforms, has driven Japanese stocks sharply higher and the yen significantly lower. That, in turn, could unleash a series of new currency rivalries.

During the past four years, the bloated balance sheets of the central banks of the United States, the European Union and Japan have doubled and then almost tripled to almost $10 trillion.