Tuesday, 19 January 2016

Is the world prepared for the next crisis?

In all the past global economic recessions, central banks would usually step in and stimulate/ prop up the economy with loose monetary policies. Governments would also implement certain fiscal policies and even extreme measures (bailout) to help businesses to survive a sharp downturn.

Ben Bernanke cut interest rates from more than 5% to 0% in the previous crisis and kept it that way over 7 years. The world also enjoyed 3 rounds of QE. Seeing the effectiveness of these 2 measures, major central banks in Europe and Asia follow suit. Everyone kept interest rates low and carried out their versions of QE since 2008. 

Unfortunately, since interest rates are already low, Janet Yellen has very little left to manoeuvre. The best she can do is to either postpone further hikes or maybe even cut it back down to 0%. Worst still, QE3 showed us that printing huge amounts of money loses its effectiveness the more times you do it. So, QE4 or QE5 would arguably harm the economy more than help it. As a result, central banks around the world have no more weapons left in their arsenal to fight a global recession.

But the all-powerful governments can surely save the day, I hear you say. Not really. Many governments have huge debts on their balance sheets. Some of their budget deficits are mind-boggling huge! They are already struggling to stay solvent (looking at you Greece!).  Many developed countries have their credit rating cut. Even USA had its 'AAA' rating cut in 2011! >___<

In conclusion, I think the world ill-equipped to handle the next crisis in a swift and effective manner. On the personal front, I hope everyone has been saving up that 'rainy day fund' because we might need it soon.

Always be prepared

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