By Francesc Raventós – The International Monetary Fund, other economic institutions, politicians, experts, and a good number of indicators predict a new economic downturn. The causes will be diverse but the significant one is that debt worldwide has grown at an exaggerated rate.
According to the report of the International Finance Institute, IIF, global debt is $247-plus trillion, 318% of GDP.
In the 2000s or noughties an expansive fiscal and monetary policy with low interest rates generated significant public deficits, a strong increase in borrowing and created a stock market and real estate bubble that erupted in 2007, forcing central banks to push for a huge monetary expansion – Quantitative Easing – to get out of the crisis eventually.
With a lot of financial liquidity in the market at a cost close to zero, the economy has regained growth and, for now, inflation is under control. But the economic cycle cannot be considered closed until central banks’ debt and interest rates return to normal. Trust in the International Monetary System, and the main currencies remains, but if some day trust in one important currency is lost, the situation would be very delicate.
Now the economic recovery has been achieved, it is time to gradually restore debt and interest rates to reasonable levels (aka tapering). The US Federal Reserve (Fed) has already increased its interest rate and announced that it will continue to do so.
The consequences have been immediate, with the withdrawal of investments from emerging countries, such as Argentina, Brazil, South Africa, India or Turkey, to invest in American bonds. The European Central Bank (ECB) has also announced that by the end of 2018 it will stop buying debt and that interest rates will rise as the economy improves (but not before the summer of 2019).
What will be the consequences of tapering?
Will it destabilize the economy?
What are the risks of entering a new recession?
Will the current monetary system resist?
How will the governments that are highly indebted deal with recession? more>