Sunday, March 25, 2012

Unease About the Global Economy
Joe El Rady

The financial meltdown of 2008 continues to fray nerves among investors and policymakers. A pall of unease still shrouds global financial markets that seem spooked by the limited efficacy of policy tools and the complete inefficacy of the policymakers employing them.

The unease has manifested in high volatility and low volumes. It has fogged investors' visibility of the future. Coupled with fear about high levels of sovereign debt and potential defaults, the unease has shortened investor horizons. The product: short term thinking and planning.

The reality of our current state: monetary policy has shown limited efficacy and malignant side effects while fiscal policy has, mostly due to political hijacking rather than economic underpinning or planning, fallen flat.

In many countries, exchange-rate issues have constrained monetary policy. The members of the Eurozone discarded exchange rates as a policy tool when they adopted a single currency. On the fiscal side, policymakers don’t know how to handle the fiscal issues posed by the financial crisis. Doubts about the sustainability of sovereign debt loads produce sudden surges in interest rates, as risk premiums (VIX) rise dramatically with perceptions of likely default.

Welcome to the post-crisis world.