Cheap money no alternative to structural reforms
Speculations on exactly when the US Federal Reserve will raise interest rates are high, because it could be a game changer moving global markets in significantly different directions. Speculations are also rife on why the Fed has dragged its feet on the matter.
But the fact that the world economy has still not emerged from the shadows of the 2008 global financial crisis should justify an immediate end to the unprecedented experiment of zero interests that the US led the world into.
The sooner that happens, the faster necessary reforms can be implemented in all countries and the better the chances will be for the world economy to improve. The resulting elimination of uncertainties in the global financial market, rather the world economy as a whole, will be more than welcome for China which is implementing far-reaching economic reforms to survive its difficult slowdown.
Recent signs that an increasing number of developing economies are under rising pressure of capital outflows have prompted calls for the Fed to postpone the inevitable for another couple of months.
But each day has passed with investors putting on hold big bets ahead of the Fed’s policy meeting, with the world economy a step behind on its long road to recovery.
Seven years after the collapse of Lehman Brothers, aMinsky moment that forced major developed countries to print huge amounts of money to save their economies, the global recovery remains disappointingly fragile.
OnWednesday and Thursday the Fed will hold a closely-watched meeting to decide whether or not to raise interest rates for the first time since 2006. The Fed has indicated it will raise rates when it sees a sustained economic recovery, with emphasis on jobs and inflation, in the US. But the complex economic scenes in the US, where the job market has improved somewhat while inflation has been pulled fairly down by weak oil prices, ostensibly give no guarantees, up or down. Not to mention the likely dire consequences a change in the US monetary policy will bring about, whose brunt will be borne by developing countries.