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Sufficient and Sustainable Global Economic Growth Remains Elusive

Sufficient and Sustainable Global Economic Growth Remains Elusive

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Monday, 12 October 2015 08:22 AM Current | Bio | Archive

Fed Vice Chairman Stanley Fischer said most members of the FOMC anticipate that economic conditions are likely to warrant raising short-term interest rates at a gradual pace over the next few years.

Fischer, speaking at the Group of 30 (often abbreviated to G-30, which is an international body of leading financiers and academics) International Banking Seminar in Lima, Peru, said that is “an expectation, not a commitment.”

Both the timing of the first rate increase and any subsequent adjustments to the federal funds rate target will depend critically on future developments in the economy. He also said the September FOMC statement notes the Fed is monitoring developments abroad.

He added the FOMC does not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.

He concluded monetary policy normalization in the U.S. will only occur in the context of a strengthening U.S. economy, and even though it has been clear from conversations at this conference IMF/World Bank, that many officials of emerging market and other countries feel sufficiently forewarned and prepared for them to want us “to just do it.”

Probably, when Fischer’s speech was written, it wasn’t public knowledge yet what China’s Finance Minister Lou Jiwei was going to say on the sidelines of that same event: “The U.S. economy has benefited from the position of the U.S. dollar in the global currency system, and has revived relatively faster  … The U.S. should bear more global responsibility and is not yet in the condition for an interest rate hike.”

That said, it becomes really more than worrisome for literally everybody how the leading monetary policy makers, and politicians as well, still haven’t been able to agree on a way to spark "sustainable and sufficient" global economic growth.


In this context, the G-30 in its newly published report “Fundamentals of Central Banking – Lessons from the Crisis,”  concludes, “Central banks worked alongside governments to address the unfolding crises during 2007–09, and their actions were a necessary and appropriate crisis management response. But central bank policies alone should not be expected to deliver sustainable economic growth. Such policies must be complemented by other policy measures implemented by governments. At present, much remains to be done by governments, parliaments, public authorities, and the private sector to tackle policy, economic, and structural weaknesses that originate outside the control or influence of central banks.”

Please let’s remain realistic when we have to take into account governments will have to do their part of the job we should accept it doesn’t bode well, especially when now after more than 7 years, and counting, of extremely easy monetary conditions (QE) all these undertakings haven't generated the inflation levels and the strength of the recovery that were hoped for.

What is for sure is that we have seen all those trillions of dollars that have been made available through easy monetary conditions (QE) have contributed to:
  • massive misallocations of real resources in the global economy;
  • hereby reducing potential outputs and
  • increasing broad asset prices to unsustainable levels, which is of course the “Sword of Damocles” that continues hanging over the markets. 

It’s obvious the Fed still seems to prefer remaining extremely cautious and remains in its corner, wherein it has boxed itself in knowing very well the day it starts raising rates or even starts firming its policy guidance to that end, that will unavoidably cause further strengthening of the dollar, which is economically and financially undesirable in the U.S. and abroad.

Coming back to the global economic and financial mess we are in, how this all is going to play out remains anybody’s guess.

One thing is for sure: “losses will by far overwhelm gains” for the vast majority of the still fully invested portfolios who haven't "cash" equivalents ready on the sidelines.

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HansParisis
One thing is for sure: “losses will by far overwhelm gains” for the vast majority of the still fully-invested portfolios who haven't "cash" equivalents ready on the sidelines.
investors, global, economy, financial mess
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2015-22-12
Monday, 12 October 2015 08:22 AM
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