It's true that when Wall Street sneezes the whole world catches cold. But this time, the situation is quite unique and slightly unpredictable. It's like a huge meteor hit the world and we are now faced with an apocalypse like situation which has never been confronted before.
According to the latest report by New York Fed Consumer Credit Panel, there has been the largest debt accumulation in the US economy amounting to a whooping $14.3 trillion . Student debt loan sits at $1.51 trillion, credit card debt at $1.41 trillion and car loan at $1.33 trillion.
The pictures are quite alarming and sure has created a bubble that may wipeout huge amount of investor's money. However the irony is that in order to stop the bubble from popping, the Fed has been on a printing spree to support business and ignite consumer spending, which in turn is actually fueling the bubble by startling the equilibrium in the money market.
The money market equilibrium demands that the real demand of money should be equal to real supply of money, but the change in the equilibrium taking place will alter the strength of global currencies adversely, thereby marking the beginning of stagflation around the world.
Again, in an attempt to suppress this situation, the Fed lowered the interest rates to near zero level so that people and business borrow more and the economy kick-starts.
But what the Fed is not realizing probably, is the lack of consumer and business confidencewhich allows the feeling of uncertainty to overtake and instead of spending, people save the extra bills they have.
The actions of the Fed and the US government hints that the government is following, and not following the Keynesian School of Thought at the same time. Lowering the interest rate would not play significant role in kick-starting the economy since the wages are downward sticky and the uncertainty in the market still exists, which the government is not realizing. Government should come up with fiscal and monetary policy to keep the capital and labour employed even if it means huge fiscal deficit, which the Fed is blindly following.
The problems with money and fiscal policy is not just impacted by US's monetary policy but also because of its geopolitical decisions. The self pleasing policy and show of power by the country is now hurting its currency.
China, the largest creditor of US dollar has been planning to dump $1 trillion for a long time. Not only China, but countries like India and Russia have also been working on the implementation plan. Since these countries do not have the infrastructure or a bond market like US to do so,they have found an alternative to it by forming their own development bank and lending billions of dollars to other countries with weaker financials and infrastructure.
Due to US's sanctions and protection act, these countries were frustrated with the dependency on dollar and were thus inspired to trade among each other in their local currency. BRICS's New Development Bank is their biggest step to achieve their common endeavours, and is seen as a rival to World Bank and IMF to such an extent that some of the biggest mega projects are now funded by them. Thanks to the their easy collateral demands and convenient and flexible payment methods.This has attracted numerous smaller nations to join hands with BRICS community in joint development projects. As a result, the member countries are able to dilate their influence on these smaller developing countries.
All in all, the prospects of the global economy is at an all time unacceptable rates and the bubble everyone was talking about is now a distressing reality. However, there is no turning back from here and the passage we are heading towards can only result in two outcomes.
Either the bubble deflates eventually and the economies around the world are able to adjust to the loss of wealth in the long run and the governments are be able to ensure consumer and business confidence throughout the process, or the bubble bursts and massive amounts of wealth is wiped out from the global economy, furthermore humanity will see the downfall of one of the most pronounced recession that may make the Great Depression of 1929 seem like a kid.