Follow by Email


Global Economy And Bernanke’s Dollars

In a fabulous piece in the Times, Michael Schuman argues that the global economy has become heavily addicted to the ultra cheap money polcies of the US Fed. However, he states that since the Fed will inevitably scale back, sooner or later the world is going to have to think about quitting the habit..

The proof can be found in the tumult in world stock and currency markets in recent days. Last week, global investors expected Federal Reserve Chairman Ben Bernanke to announce that he would begin to “taper” his program of quantitative easing, or QE, in which the Fed buys $85 billion of bonds a month to support growth. Yet in a surprise move, he didn’t, citing uncertainty about the strength of the U.S. economic recovery.

“We want to make sure that the economy has adequate support,” Bernanke said in a press conference, “until we can be comfortable that the economy is, in fact, growing the way we want it to be growing.”

You’d think such a statement would scare investors. After all, the U.S. is the world’s largest economy, and any indication its recovery may be sputtering (again) should be a negative for markets. Not so this time. Stock markets around the world soared. Even the stocks and currencies of emerging markets like India and Indonesia, which had gotten battered in anticipation of the taper, rebounded strongly, notes the writer. .

Schuman hits the nail on the head as he concludes that the (positive) reaction is a sign that investors have become more worried about liquidity than fundamentals. Like a smoker gladly unwrapping a fresh pack, they let themselves be cheered by the promise of further Fed cash rather than be dismayed by what it might mean. This is understandable. Ever since the collapse of Lehman Brothers in 2008, bankers, corporate executives and investors have become accustomed to operating in a global economy where money is cheap and easy to obtain. Central banks in the developed world have kept interest rates extremely low, even near zero in the U.S. and Japan, to support sagging economies.