Inflation, growth and economic activity

While the spin and dust of mortgage speculation causing the infamous US credit crunch to the global economy has yet to be fixed or cushioned, another speculative episode is brewing, or the direct consequences of the mortgage crisis. , this time the world inflation. The world’s potential growth and ultimately actual growth are jagged; countries are now gripped by another round of global inflation. Amid concerns of energy price hitting the $120 level, gold price charting new high territory, corn, wheat and rice are putting pressure on monetary easing around the world.

If we still remember, the housing bubble is mainly caused by too long and too low interest rate in the year 2001 -2002 in USA. The low interest rate was aimed to support the economy during that time; tech bubble. The low interest rate had created a feel-good factor in the consumer market, consumers flushed with cash as asset prices rose, and many used it to finance much of the spending on housing, technology, tuition, and others. . The positive reinforcement effect was so strong; when sentiment was high, demand was high, technology spending and employment were up, and the economy was booming. Even before the tech bubble grew in intensity, it was wiped out by widespread positive consumerism. However, falling prices and the ensuing credit crunch are now killing this sentiment. This reversed the very self-reinforcing effect that was responsible for the economic boom; lending has slowed, demand has fallen, consumers are more cautious about spending, the unemployment rate rises, business expansion falls, demand shrinks further, unemployment rises further, etc.

Central banks have been watching for any sign of a global recession and have been taking all the necessary steps ahead of time to stem the tide originating in the US through the interest rate. Amid this concern, and to boost the economy, the interest rate is lowered to encourage liquidity in the market, tax rebates, and other loose monetary policies. However, this problem is no longer so easy, and the flexibility that banks enjoy is now constrained by rising global commodity prices.

Now we are faced with a new challenge; world inflation or speculative inflation in oil, corn, rice, etc. The spate of speculative activity is unstoppable and has caused much of the turmoil from the tech bubble, the housing bubble, and now global inflation. As when sentiment is hit hard, cash pursues a limited path to maximize returns. When stock markets fall, funds are funneled into commodities or other avenues. One of the alternatives is currency. However, the continuous depreciation of the dollar against other currencies could not cushion the fall in purchasing power and ultimately in profitability. The volatility caused by international markets has been the reason behind the recent selling of the dollar. But the most notable and immediate concern is commodity inflation.

While expansionary monetary policies could help avoid the tech bubble by diverting technology consumption towards more general consumption. This was achieved through an interest rate that was too low and too long in the US. The effect not only increased liquidity, but reinforced another sentiment; debt spending. Because when the economy was awash with liquid, sentiment would fuel more positive sentiment, and therefore consumers became overconfident. However, when the cascade breaks, the same politics that caused the crisis cannot rescue consumers from the mountain of bad debt. One thing that will happen for sure is to further increase the debt burden if low interest rates and loan encouragement continue.

To further complicate matters, rising global inflation would not help increase spending. Most expenses, whether they are tax refunds, incentive loans, or low-market interest rates, are counted as purchases of necessity, such as corn, oil, wheat, and rice. A greater percentage of disposable income is divvied up on these purchases, and the rest is now spent more cautiously than ever. Worryingly, high liquidity will encourage refinancing of loans and new loans as well. Both are not helping to solve the problem that consumers are facing.

Certainly, the easing of monetary policies, the encouragement to spend more by central banks, is constrained by rising inflation. In an effort to boost growth, the balance is now tipping and compounded by rising inflation. If it’s simply to encourage spending, the traditional easy money method has proven to be effective. However, flexibility is now limited by rising prices.

Economies exposed to the international market, exporters face high domestic costs and reduced profit margins as the value of the dollar falls rapidly. The uncertainty and complexity of inflation and affected growth in developed countries further reduced the volume of orders from these manufacturers. To illustrate, imagine three main economic problems facing world economies, world inflation, truncated growth, and slower economic activity.