It seems likely that the global economy is heading towards a recession given recent GDP figures and negative interest rates. Couple that with a inverted yield curve and there are a lot of signs. The business cycle is an inherent part of our capitalistic system and while a recession will create hard times for a large number of people the effects are, to those of us interested in economic policy at least, not as interesting as the responses. I’ve disparaged Quantitative Easing and similar policies which have been used to fight the Great Recession and the Euro crisis frequently on the blog, and I will probably have to continue as it seems likely that those types of policies remain popular. Indeed, this post is meant as a prediction that I believe that major central banks are likely to resume large scale asset purchasing programmes. I would be incredibly surprised if the European Central Bank were to decide against more asset purchasing should there be a global economic downturn, but other candidates for turning the QE taps on again are the Bank of England and the Fed, with the caveat that the Fed is the least likely of the mentioned central banks to start buying assets as it has some room to manoeuvre given that its rates are higher than most Western central banks’.
The bottom line here is that if a slowdown is coming then central banks will have to react and as they can hardly lower rates enough to get a meaningful response then they have to use unconventional policy which will likely lead to more money in the financial system, more debt as money becomes even cheaper, and more gains to those who own equity as this makes bonds too low yield for most.
Thank you for reading and comeback next week for a new post, you can read my previous posts on QE here and you can follow me on twitter here. I'd appreciate it if you could recommend the blog to a friend or coworker if you like it.
Written by Karl Johansson, Founder of Ipoleco
Cover Photo by Pixabay on Pexels
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