A big enough hit to China’s growth or to Europe’s financial system could certainly tip the global economy from slow growth to recession. An even more frightening thought is that by this time next year, the US presidency may have turned into a reality television show.
Yet, from a macroeconomic perspective, the fundamentals are just not that bad. Employment numbers have been strong, consumer confidence is solid, and the oil sector is just not large enough relative to GDP for the price collapse to bring the US economy to its knees. In fact, the most under-appreciated driver of market sentiment right now is fear of another huge crisis.
... Some say that governments did not do enough to stoke demand. Although that is true, it is not the whole story. ... In the long run, it is supply factors that determine a country’s growth. And if countries cannot manage deep structural reform after a crisis, it is hard to see how it will happen. Running the government like a reality TV show, with one eye always on the ratings, is not going to do the job.
After five years of disappointing recovery throughout the major economies, almost everyone is ready to believe the worst. The widespread large declines in global asset prices indicate a significant divergence between what financial markets fear and what most mainstream macroeconomic forecasts are showing for the world economy. Having some clarity to distinguish between the more solid underlying economic outlook and the shadows thrown by financial puppetry is critical to avoid an unnecessary recession. In this Briefing, a group of PIIE scholars came together to provide a reality check for the global economy. They set out what is known, both about macroeconomic dynamics and policy capabilities, in a context where distrust of both mainstream economic analysis and policymakers' credibility has become excessive. Global economic fundamentals today are not so grim, though there is room for improvement in key areas including China, the United States, European banks, Brazil and Latin America, oil markets, global trade, and monetary policy options.
The discussions in Shanghai, as well as during the weeks leading up to the meeting, led to two specific elements in the G-20 communiqué that reflect an evolving global consensus on what needs to be done to respond to current global challenges.
First, G-20 members strengthened their commitment to take the actions required to boost global growth, pledging for the first time to use “all policy tools—monetary, fiscal, and structural—individually and collectively” to preserve and strengthen the global economic recovery.
The message of the United States has been consistent throughout the post-crisis recovery period: policy support is essential to ensure a strong recovery until private sector growth is on a robust, self-sustaining trajectory. The United States has consistently advocated use of a comprehensive approach that marshals all levers of economic policy
New Rules for the Monetary Game by Raghuram Rajan - Project Syndicate: "We can pretend all is well with the global monetary non-system and hope that nothing goes spectacularly wrong. Or we can start building a system fit for the integrated world of the twenty-first century.
Monetary policy is not enough to beat deflation - FT.com: "Vítor Constâncio, ECB vice-president, last week defended monetary policy against the critics by pointing out that “countries that could use fiscal space, won’t, while many that would use it, shouldn’t”. He asked: “If not monetary policy, then what?” It is time to answer that question. Governments have relied too much on central banks to revive flagging growth. If everything but monetary policy is ruled out, then the only option left to central banks is to be even bolder."