Shyamal Banerjee/Mint

Shyamal Banerjee/Mint

Ourview | A faltering global economy

Ourview | A faltering global economy

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

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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