Money: Saving the World Economy

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Money: Dave Deruytter suggests that the Central Banks alone cannot save the world economy.

Since the world financial and economic crisis of 2007-2008, there seems to be a lingering belief in the financial and business markets that the central banks of the key economies in the world alone can save the international economy from a new major downturn.

Yes, central banks have a lot of tools to help the economy. And they have proved themselves to be very original and creative in the past decade with the invention of Quantitive Easing, the massive buying of government paper, even bringing the interest rates of some key currencies down into negative territory.

Still, with the current headwinds of an international trade war and a possible no-deal Brexit, a big surprise may be on the horizon for the complacent observers or stakeholders. Indeed, what can there possibly be left more to do for the central banks to stimulate the world economy beyond the revolutionary, yet dangerous, new techniques of the past years?

Governments in too many places seem to be playing treacherous economic and political war games without properly checking out the pragmatic realities in the real economies or the health of the finances of their countries.

One of the canaries in the coal mine is a country like Singapore, very dependent on international trade and on the brink of going into an economic recession (two consecutive quarters of negative growth). Many export- dependent South East Countries may follow suit soon. Other global production countries, such as South Korea, are not far behind. Even Germany, the industrial engine of Europe, has been feeling the pain of the global trade war since the beginning of 2019.

A leading indicator in many countries is the hiring scene. And there the picture has been turning in the current year from a steel blue sky, with job seekers leading the market, to a cloudy picture with a possibility of thunderstorms or worse to come.

Economic cycles are normal, but when money is soooo cheap for such a long time, the reasons for a downturn are typically unnatural, major global distortions, like the US-China trade and economic war and the Brexit mess. Japan and South Korea bickering does not help either.

In its recent round of monetary easing, the European Central Bank has ‘forced’ banks to lend even more money to people and businesses or to make less money themselves. In the normal circumstances of a typical cyclical downturn this should be applauded. But not this time since the approaching downturn is caused by a trade war and prolonged uncertainty surrounding the UK leaving the EU.