As Stephen Roach says "It was never going to be easy, but central banks in the world’s two largest economies – the United States and China – finally appear to be embarking on a path to policy normalization". Addicted to an open-ended strain of extreme monetary accommodation, that was established in the depths of the crisis of 2008-2009,as recent developments have shown the return by US and China Central Banks to less expansionary monetary policies,financial markets are now gasping for breath
The Fed and the Central Bank of China are on the same path, but for very different reasons. For the Fed there seems to be a sense that the emergency scenario where unorthodow monetary policies in special circumstances was appropriate,today given the latest economic indicators of the U.S, it is not anymore. China instead is attempting to ensure stability by reducing the excess credit leverage that has long supported the real side of an increasingly credit-dependent Chinese economy.
Both actions are correct and long delayed. While the Fed’s first round of quantitative easing helped to end the financial market turmoil that occurred in the years 2008-2009, two subsequent rounds QE2 and QE3 , have done little to alleviate the lingering pressure on over-extended American consumers. Indeed, household debt is still in excess of 110% of disposable personal income and the personal saving rate remains below 3%, averages that compare unfavorably with the 75% and 7.9% norms that prevailed, respectively, in the final three decades of last century.
inequalities in the chinese economy(See Past Posts in this Blog)
"Financial markets are having a hard time coming to grips with the new policy mindset in the world’s two largest economies. At the same time, investors have raised serious and legitimate questions about Japan’s economic-policy regime under Prime Minister Shinzo Abe, which unfortunately relies on quantitative easing and yen depreciation rather, than on a new structural-reform agenda.
As financial markets come to terms with the normalization of monetary policy in the US and China, while facing up to the shortcomings of the BOJ’s efforts, the real side of the global economy is less at risk than are asset prices. In large part, that is because unconventional monetary policies were never the miracle drug that they were supposed to be. They added bubbles to financial markets but did next to nothing to foster vigorous recovery and redress deep-rooted problems in the real economy''says Roach.
Breaking bad habits, is hardly a painless experience given the price distortions that easy money creates. "But better now than later, when excesses in asset prices and credit markets would create new and dangerous distortions on the real side of the global economy. That is exactly what pushed the world to the edge in 2008-2009, and there is no reason why it could not happen again"says Roach
The Fed and the Central Bank of China are on the same path, but for very different reasons. For the Fed there seems to be a sense that the emergency scenario where unorthodow monetary policies in special circumstances was appropriate,today given the latest economic indicators of the U.S, it is not anymore. China instead is attempting to ensure stability by reducing the excess credit leverage that has long supported the real side of an increasingly credit-dependent Chinese economy.
Both actions are correct and long delayed. While the Fed’s first round of quantitative easing helped to end the financial market turmoil that occurred in the years 2008-2009, two subsequent rounds QE2 and QE3 , have done little to alleviate the lingering pressure on over-extended American consumers. Indeed, household debt is still in excess of 110% of disposable personal income and the personal saving rate remains below 3%, averages that compare unfavorably with the 75% and 7.9% norms that prevailed, respectively, in the final three decades of last century.
Real consumer demand has remained stuck on an anemic 0.9% annualized growth trajectory since early 2008, keeping the US economy mired in a decidedly subpar recovery. Unable to facilitate balance-sheet repair or stimulate real economic activity, Quantitative Easing, instead, has become a dangerous source of instability in global financial markets.
The recent spasms in financial markets leave little doubt about the growing dangers of speculative excesses that had been building. Fortunately, the Fed is finally facing up to the downside of its grandiose experiment.Recent developments in China in terms of less growth in GDP and less expansive monetary policies have equally powerful implications. There, credit tightening does not follow only from independent central bank; rather, it reflects an important shift in the basic thrust of
the state’s economic policies. China’s new leadership, headed by Premier Li Keqiang, seems determined to end past targets of rapid pace of economic growth and to refocus policy on the quality of growth,diminishing inequalities in the chinese economy(See Past Posts in this Blog)
"Financial markets are having a hard time coming to grips with the new policy mindset in the world’s two largest economies. At the same time, investors have raised serious and legitimate questions about Japan’s economic-policy regime under Prime Minister Shinzo Abe, which unfortunately relies on quantitative easing and yen depreciation rather, than on a new structural-reform agenda.
As financial markets come to terms with the normalization of monetary policy in the US and China, while facing up to the shortcomings of the BOJ’s efforts, the real side of the global economy is less at risk than are asset prices. In large part, that is because unconventional monetary policies were never the miracle drug that they were supposed to be. They added bubbles to financial markets but did next to nothing to foster vigorous recovery and redress deep-rooted problems in the real economy''says Roach.
Breaking bad habits, is hardly a painless experience given the price distortions that easy money creates. "But better now than later, when excesses in asset prices and credit markets would create new and dangerous distortions on the real side of the global economy. That is exactly what pushed the world to the edge in 2008-2009, and there is no reason why it could not happen again"says Roach
