The study by professors noses at the impact of covid-19 on the global economy is not pretty. It is a sobering forecast, and a serious concern for policy makers around the world. It is not that the policies passed in Washington or in Europe are inefficient, it is that they are being pushed through the markets in a way that makes them difficult to see the forest for the trees. In some ways, the policies being implemented to "stimulate recovery" in the global economy are like dandelions trying to break into a walled garden.
Policy makers have, perhaps for lack of better terminology, not been very transparent with the effects of this policy on the global economy. They are still convinced of the policies being efficient and necessary to "get the American economy moving again". That is, they think that if things get tight again in the US, and the European economy takes a huge hit, then all the policies passed by Washington will be vindicated. But, reality tells a different story. While there are short-term contractions in Europe, in Asia, there are no such short-term contractions.
In the face of such alarming situation, policy makers, including the Federal Reserve, should come out with a clearer and more realistic forecast of how the global economy will fare over the next few years. This is a necessity, because no long-term plan can work unless there is a vision of the future. If the projections are too gloomy, then a critical mass of citizens will simply opt for another recession. That's a recipe for more confusion and disappointment.
How will the Federal Reserve cope when its plans for rate increases are opposed by a majority of the population?A policy that attempts to understand the present as the starting point of future projections is a risky one. The Federal Reserve has been too dependent on past data to accurately judge the health of the US economy today. Many economic pundits, including the widely trustederalized Brad Barket, have repeatedly tried to forecast what the national income will look like in the next five to ten years. The end result is always the same - a lot of jubilation for the Federal Reserve, and widespread pessimism about the global economy. Neither result is useful when trying to make policy.
How do we see the Federal Reserve influences rates in the US? On the one hand, the Fed is probably trying to wait out the recession before raising rates again. On the other hand, there is no guarantee that rates will remain low for an extended period. In fact, the Reserve may keep them artificially low for the rest of the decade, depending on how the global economy plays out. If rates start to rise again, they won't be able to bring them back down to their historical average.
For this reason, the Fed may continue to hold rates steady for the time being. On the other hand, some experts believe that the low readings on the US economy were caused by the weak economy in China. That nation's economy is expected to grow more quickly than the US over the next few years, which will cause its exchange rate to become higher. Since the United States has already tried to curb its growth through Quantitative Easing, or printing paper currency, the Chinese government does not feel comfortable trying to fight inflation alone. That's why Chinese officials are offering more than $1 trillion in foreign currency reserves in an effort to keep the economy growing at a healthy pace.
China's central bank thus has more buying power than the US government and can raise the amount of money it prints if necessary to fight inflation.That means that the weaker exchange rate in the United States is being felt globally. Global inflation is likely to continue, and will only get worse if the US does not react quickly to the crisis.
The only way to combat rising inflation is to have strong economic policy, and that means the United States must stay aggressive in pursuing its goals of increasing its dollar-based economic strength. That means raising rates, cutting back on purchases of non domestically manufactured goods, and taking aggressive steps to combat deflation.In fact, the recent sluggishness of global economic growth may make deflation a worse problem in the future. That's because deflation causes companies to increase their prices for goods and services, thereby reducing demand. That can ultimately lead to a reduction in output, which will lead to a decrease in employment. If the US government is not careful, a prolonged period of economic slumps could make the impact of covid-19 on global economy even worse than it already is.