More Monetary and Fiscal Policy Measures In the Offing

The global financial crisis seems to have taken the US by storm. Statements by the US Fed suggest that the nation’s economy is headed for a recession if already not there.Even though, the US announced a US $ 700 billion rescue package, opinion is fast emerging that this may not be sufficient. While, the current rescue package may lead to some stabilization of the financial system, it may not be sufficient to restore consumer spending and banks may still be weary to lend. Even stabilization and unfreezing of financial markets is likely to take time. Under such circumstances, the economic psyche of lenders and consumers alike is likely to remain negative, pulling the economy into a negative spiral.

While the US and various other nations have taken dramatic steps to address the financial crisis, the storm seems to be far from over. The currency markets also seem to have to have become like a video game. When one nation announces a rescue package, its currency rises. Then as soon as another nation follows suit, the latter’s currency takes the lead. At the same time, Asian markets open, while the US markets sleep, and portray a new trend, which could change on the opening of US trading. While, the Yen took lead earlier due to risk aversion and sell off of carry trades, it fell later as there was not much good news on the Japanese economy. In essence, the currency markets are a roller-coaster for now and with the economic virus spreading far and wide, economic recovery and further economic performance are debatable. This implies that, until the dust from this economic implosion settles, trends in the currency market may be hard to predict, and it may be best to prepare for and enjoy a roller coaster ride.

In desperate attempts to reverse the negative psyche and the imploding financial cycle, the Fed and governments of other nations are planning further stimulus packages. At this point it seems hard to discern, if these are stimulus packages, or more of crisis management attempts.

In any case, the US government is likely to announce further easing of monetary policy via interest rate cuts. This could enhance liquidity in the system and with the government taking partial stakes in banks via its $250 million rescue package, it could start putting pressure on banks to lend. With government backing some of the risk, banks could commence some cautionary lending. However, this may not be enough to lubricate the financial system, which was filled with trigger-happy lenders just some time back, providing enormous amount of liquidity in an economy that was on the uptick. Cautionary lending coupled with a collapsing economy may be, too little, too late to have a positive impact.

Well, consumers also need to be pulled out of their shells and a fiscal stimulus can help do that. The government, earlier this year had enacted a $ 168 billion stimulus package, whereby most Americans received tax rebate checks between $600 and $1200. But, under the given gloomy scenario, such stimulus may lead to consumers hoarding the money and even a fiscal stimulus may not result in a big jump in consumer spending. Thus it appears that the US government and other governments are burdened with an onerous task of pulling individuals and organizations out of their shells and get the economy going.   

As far as currencies go – A roller coaster ride is what one may expect!!

  • rahiman

    Does this current situation the reflection of Boom/Burst sequence?

  • rahiman

    Does this current situation the reflection of Boom/Burst sequence?

  • melchiorus

    This is definitely a bust. Not sure when the boom will come along though.

  • melchiorus

    This is definitely a bust. Not sure when the boom will come along though.

  • forexgump

    The current economic crisis indeed represents a bust in the boom and bust economic cycle. The boom part of the economic cycle is led by positive movement of most economic indicators like employment generation, industrial growth etc. The converse is true in the case of a bust.

    The US for a long period of time had managed to achieve a moderate rate of growth with low inflation, also termed as NAIRU or non accelerating inflationary rate of unemployment. This gave confidence to the US monetary authorities to let monetary policy be easy to sustain strong growth. What turned out was loose monetary policy being followed for too long accompanied by poor regulation of the financial sector. The loose money found its way into the economy via several routes, pumping up prices of goods with inelastic supply the most, especially real estate.

    Poor regulation led to the risk spreading globally via sophisticated financial instruments in the name of de-risking. Hence, this bust is powered by a much greater potential for devastation as the preceding boom was pumped in with too much liquidity.

  • forexgump

    The current economic crisis indeed represents a bust in the boom and bust economic cycle. The boom part of the economic cycle is led by positive movement of most economic indicators like employment generation, industrial growth etc. The converse is true in the case of a bust.

    The US for a long period of time had managed to achieve a moderate rate of growth with low inflation, also termed as NAIRU or non accelerating inflationary rate of unemployment. This gave confidence to the US monetary authorities to let monetary policy be easy to sustain strong growth. What turned out was loose monetary policy being followed for too long accompanied by poor regulation of the financial sector. The loose money found its way into the economy via several routes, pumping up prices of goods with inelastic supply the most, especially real estate.

    Poor regulation led to the risk spreading globally via sophisticated financial instruments in the name of de-risking. Hence, this bust is powered by a much greater potential for devastation as the preceding boom was pumped in with too much liquidity.