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Ourview | A faltering global economy

Ourview | A faltering global economy
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First Published: Sun, Aug 21 2011. 09 59 PM IST

Shyamal Banerjee/Mint
Shyamal Banerjee/Mint
Updated: Sun, Aug 21 2011. 09 59 PM IST
The world markets are seeing a crisis of credibility. Investors have realized that the swift recovery they had expected from the North Atlantic financial crisis had been built on false hopes. They had trusted in the ability of governments and central banks to rapidly get the economy back to business as usual and they now realize that that faith may have been misplaced.
After the Lehman collapse, the combination of loose monetary policy and fiscal stimulus led to a steep rise in asset prices. When the stimulus showed signs of flagging last year, the US Federal Reserve responded with another round of quantitative easing, or buying bonds from banks. The first signs of fiscal distress in Europe led to relief packages for countries such as Greece and Ireland. The equity markets responded with optimism, especially in the US.
Shyamal Banerjee/Mint
But it didn’t take long for those initiatives, too, to run out of steam. The US recovery is faltering, while fresh cracks have appeared in Europe. The question the markets are asking is: what will policymakers do now? They have already tied their hands so far as fiscal policy is concerned. Public debt has ballooned and they do not have the stomach to take on any more. So what will monetary policy do then? Will we have even stronger doses of the same medicine, such as another round of quantitative easing? Why should we expect it to work when previous rounds didn’t? And even if the central banks in Europe and the US try more unconventional methods, there’s scepticism whether such quick fixes are the way forward. The net result is that the old worries are back, including concerns about the health of banks. The very high level of uncertainty has led to a flight to safety, seen in the record low yields on US government bonds and, of course, in soaring gold prices.
And yet, there has been no dearth of sane voices who have warned that monetary policy in countries such as the US is akin to pushing on a string and that, given the nature of US politics today, there was little hope of a New Deal-type stimulus. In the circumstances, a long period of slow growth is inevitable.
In India, many have argued that lower oil and commodity prices, a consequence of slower global growth, will benefit the country. But much would depend on the stance taken by the Reserve Bank of India. While inflation may be at or near its peak, it’s still too high for comfort and it’s too early to talk of a reversal of the tight money policy, unless, of course, the situation in Europe gets worse. More importantly, the time for quick fixes is gone and we cannot, either in India or the West, put off real reform any longer.
Are governments ready for tough economic measures? Tell us at views@livemint.com
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First Published: Sun, Aug 21 2011. 09 59 PM IST
More Topics: Ourviews | World Markets | Fed Reserve | RBI | Oil |