Macroscope | Policymakers must change tack to avert the next financial crisis
‘There is bound to be major collateral damage as the global cost of borrowing rises and the flow of cheap money goes into reverse’
Our world leaders never said it would be like this. Sure, they never promised us a rose garden, but we have entered the realm of a very dysfunctional world that is becoming more difficult to grasp and manage by the day.
God help us all in the coming months as the central banks struggle to wean us off super-stimulus and return us to some form of normality. It will be tough and we will all feel the pinch.
The central banks stuffed our pockets full of cash, led us into the candy shop and we obliged by binging on sweets by the bucket load
The days of easy money are coming to an end. Policymakers have thrown a lot of goodies at us since the 2008 crash to get the global economy up and running again. The central banks stuffed our pockets full of cash, led us into the candy shop and we obliged by binging on sweets by the bucket load. Consumers, businesses and markets have all over-indulged and are due for a crash diet soon.
The central banks are being far too glib about the scale of the task ahead. US Federal Reserve Chair Janet Yellen has likened future tightening to a slow burn – “like watching paint dry”. That could not be further from the truth. If zero interest rates and the deluge of quantitative easing money were the frontline forces in defeating global pandemic back in 2008-9, there is bound to be major collateral damage as the global cost of borrowing rises and the flow of cheap money goes into reverse.
The Fed assures us the US economy should be resilient enough to withstand any ‘withdrawal shock’. After all, the economy is steaming along, close to full employment and stock markets are in celebratory mood. Surely, what is good for the US should be good enough for the rest of the world, even as the easy times begin to fade away? Or at least this is what rampant stock market bulls seem to believe right now.
Thanks to the crash there has been a dramatic reshaping of the old order. Customary economic relationships don’t work as they used to
Except times have changed, and thanks to the crash there has been a dramatic reshaping of the old order. Customary economic relationships don’t work as they used to. Under normal circumstances, US consumer spending on goods and services should account for up to 70 per cent of America’s gross domestic product, providing the powerhouse of the recovery. Sadly, it is unlikely to produce the same results in the future. The linkages have changed and US consumers are not as robust as they once were.
