How Central Bankers and Policymakers are Losing Control of the Global Economy

The US Fed and Tapering of Quantitative Easing (QE)

The recent announcement that the United States Federal Reserve was thinking of tapering the Quantitative Easing program or QE immediately spooked the stock markets, which went into free fall. Mind you, this was not the actual tapering off the program but just a line of thought. This means that when the actual QE is stopped, it is anybody’s guess as to what would happen to the global markets.

The point here is that ever since 2009, the world has been addicted to easy money provided by the Fed. This slosh of liquidity has resulted in asset bubbles and stock market highs none of which is based on fundamentals.

Indeed, as the unemployment, inflation, and growth figures for the US and the Europe show, little has changed in the way of announcing that the economy is recovering. On the other hand, what we are witnessing is the stock markets and the assets being pumped up with easy money and endless money printing.

Given the fact that the rationale for the QE program was to stimulate growth, it is surprising that the real objectives have not been met and instead, what we have are asset bubbles and a stock market that is addicted like a junkie to the flow of easy money. As mentioned earlier, once the QE ends it is impossible to judge what would happen to the global economy.

The Situation in China and Europe

As for China, the situation there is deteriorating as well because of the humungous nature of the shadow banking system that is unregulated and has now slipped beyond control of the policymakers.

In other words, the shadow banking system that has gorged itself on a supply of credit now finds that the payments are coming due. This means that the Central Bank of China is now faced with the unenviable prospect of either reining in the shadow banking system or risk total collapse of the Chinese economy.

Things are not looking bright in Europe as well as the European Central Bank or the ECB has now lost control over the debt crisis and as the Eurozone crisis was largely political in nature, the politicians too do not seem to have a clue about how to contain and manage the sovereign debt crisis afflicting Europe that threatens to bring down the European Banking System.

All these are pointers to the fact that in most countries, the central banks and the policymakers are losing control over the vehicle called the economy and therefore, chances of the economy crashing are higher now than in 2008/09.

Other Emerging Markets

As for the other emerging markets like India, the situation is no better as the various policy measures and the stimulus have not kick started the growth and instead, have resulted in inflation that is now in double digits. With the Rupee in freefall, it is anybody’s guess as to the future course of action for the RBI or the Reserve Bank of India and the policymakers.

Apart from India, Brazil and South Africa seem to be faring worse as civil unrest and popular anger against the policymaking elite threatens to unravel their growth stories.

Casino Capitalism and the Calling of the Bluff

The clear implications of all these examples are that the Central Bankers and the policymakers have lost control of the economies of the world, and the situation now resembles a casino where high bets have been placed and each player is trying to call the other’s bluff in a game of high stakes poker.

Like in Casino games, the fun stops when the cards are counted. This means that for the global economy, once the Fed tapers off the QE and the ECB decides against more funding for Greece, Spain, Portugal and Italy, and China decides to clamp down on the shadow banking system, the global economy would resemble chaos and disorder which can lead to systemic breakdowns and a general loss of confidence.

As any financial expert would tell you, the financial world operates on confidence, sentiment, and a general trust in each other. As the points made so far indicate, once any of these conditions evaporate, the game is up.