Fault Lines 2.0 - Is The World Already Moving Towards A Depression?

The idea behind this monetary easing and lowering interest rates is to achieve inflation targets so that people spend more money and in the process boost economic growth. Other than trying to get consumption going again, there is another side to this story, too. When countries print more money, they also want to cheapen their currency against other currencies and, thus, boost exports and discourage foreign imports. But this has made things difficult for export oriented economies like China, where consumer demand has not been the major driver of growth. To protect their competitiveness, countries are intervening in markets like China’s recent devaluation of the Yuan to boost exports and check its economic slowdown.

However such protectionist policies by nations could lead to compression in global trade and overall demand for products similar to what happened during the 1930s. And this can lead to more problems than solving the current ones. This is put very well in Rajan’s own words: "The question is are we now moving into the territory in trying to produce growth out of nowhere or we are in fact shifting growth from each other, rather than creating growth."

This lack of coordination between central banks across the world is producing spillovers that may get difficult to control and could force the world into another crisis, at a time when the world is less than capable to handle it. Developed countries’ average debt-to-GDP ratio has risen by more than 50% in last decade. Overall, global debt now sits right at $200 trillion — nearly three times larger than the world’s entire economic output in a given year. Monetary policy easing has led to near zero interest rates which mean if central banks face their next recession, they risk having almost no room to boost their economies by cutting interest rates further. Rarely have so many large economies been so ill-equipped to manage a recession.

This calls for all the more measures at a global level to check any impending recession. The central banks of the world need to work in a much more coordinated way so as to avert any major financial crisis. As Rajan had earlier suggested this may require multilateral institutions like IMF to take up the role of an international regulator to re-examine the 'rules of the game' - for responsible policy making, and develop a consensus around new ones. It needs to be ensured that no matter what a central bank's domestic mandate; international responsibilities should not be ignored.

This article was prepared by Currenc-I, the Economics club of IIM Indore.