HEADING TOWARDS A NEW FINANCIAL CRISIS
The global economy has become more fragile financially than 2008 and the world will not get out without a crisis from the negative interest process. In the aftermath of the global crisis, the debt rose to $50 trillion,
assets' bubble formed with the low interest rates and abundant money.
What is important is what will happen to the US economy. If a long period of stagnation or contraction in the economy occurs there, there will be no power to keep the world economy going. The United States and the Fed can do nothing against this new shock for they have exhausted their ammunition. In this case, the world will experience a more severe debt crisis.
There's a concern regarding the outlook of the world economy; growth has dropped to the lowest level after the crisis. Although the United States caused the crisis, it recovered faster than the other economies but it's economy is much more fragile than thought. Both in the USA and in the EU, the crisis was mismanaged.
The applied policies have even made more serious the systemic and structural problems of the world economy. Income distribution has deteriorated further. The purchasing power of workers is not enough to buy the goods and services they produce and this is creating problems in the demand and reduces the production. Companies are more engaged in speculation than productive investment. They create a bubble in the stock market or real estate market by borrowing excessively.
For these reasons, there are serious and widespread concerns about heading towards a new crisis without fully resolving the crisis that began in the USA. In the case of a new economic recession, there is nothing much that the USA can do because the ammunition has been exhausted. Federal Reserve lowered interest rates, made the monetary expansion and opened a financial package. Aside the economic crisis, Europe has not been able to solve the financial crisis. The Euro-zone was able to catch up in the first quarter of the 2016 the pre-crisis level of GDP after sustaining revenue losses for a long time.
The crisis is spreading to emerging and developing countries as a third wave after the US and Europe. 3-5 years ago, these countries were the locomotive of the world economy. Currently the issue has become a part of the problem. They're all almost fragile, including China and India; some are already in recession. The rest is showing efforts to grow with debt. More importantly, the global economy has become financially more fragile. The reason for the crisis in the US and the EU, was excessive debt. The solution that was found to it was zero interest rates and rapid monetary expansion by creating more debt.
Not only in the US and Europe, a total of 50 trillion dollars in debt has been created all over the world since 2008. GDP ratio of this debt has increased 50 points over the last 6 years. Most of them are denominated in dollars and carry a serious interest and exchange rate risk. If the global economy starts to shrink once again and enters a recession, a significant portion of this debt can not be paid and there can be a larger debt crisis than 2008.
The fate of the entire world has become almost dependent on US monetary policy. It is very difficult to revert from the zero interest rate policy or negative interest rate without creating an earthquake in the capital and money markets.
What can be done against a serious and persistent financial shocks that may come from the US or from the financial markets? Most of the economies don't have many options. The economic foundations are not solid, saving and investment are very low, the balance of payments is fragile, reserves are insufficient and the industry is weak.
The area of maneuver for fiscal and monetary policy is much more limited than in 2008. The response to the shocks may be as usual like raise interest rates, use the reserves, once they are finished borrow from the IMF, rescue the banks and foreign creditors, let the IMF tighten more your belt, the economic growth will shrink and the unemployment will rise. The economies that do not want to face such a situation should plan right away what to do against the almost inevitable shocks.
