Janet Yellen’s Use of One Word Shows Something has Gone Wrong
Recession and seven years into the most radical easing of monetary policy in recorded history.
It begs the question: what has gone wrong?
Well, the obvious answer is that monetary policy simply is a weak antidote to the fundamental and structural impediments to global growth.
The world is still grappling with a problem of over-indebtedness. This is particularly acute in China as the country simultaneously rebalances from overinvestment in the industrial sector to consumer services.
Germany is following a policy of austerity to the detriment of its Eurozone allies (in part due to trust issues with its partners or possibly just a pervasive culture of frugality) –– running a budget surplus, and a current account surplus-to-GDP ratio of over 8%.
So yes, there are lingering debt and competitive hurdles in the way of European growth, but Germany’s refusal to share its economic engine with its neighbours has been a hindrance. In Japan, Abenomics has hit a wall as the country continues to weave in and out of a recession with consumer spending and incomes stagnant. The experiment with negative rates has failed so far, seen by the firming yen and renewed stranglehold placed on the country’s export.
The Brexit vote on June 23 is a classic fork in the road for the European Union, and the 64% vote (non-binding) in the Netherlands against the treaty with Ukraine (for greater economic ties) underscores the contempt that many in the region have towards the union. All the more so with the refugee and terrorism files, partly the product of open (porous more like it) borders.
Spain’s coalition government is about to fall. Italy’s banks are in disarray. Prime Minister Hollande has backed down on French reforms. Greece is at risk of defaulting again this summer.
So it is clear the European Union is splintering.
That said, the soft global background only goes so far in explaining why the US economy has been on such soft ground this cycle.
After all, nearly 90% of US GDP is autonomous. The US economy does not reside on an island, that is true, but the global economy really is a two-bit player — a truly decimal place impact. Where it matters is whether global market anxiety leads to an undesired tightening in domestic financial conditions or if the US dollar rises too far too fast.
To be sure, both of these have been in play at different times since last summer, but over time, US growth is much more a local story. — Business Insider