MUMBAI – The ongoing weakness of America’s economy – where deleveraging
in the private and public sectors continues apace – has led to
stubbornly high unemployment and sub-par growth. The effects of fiscal
austerity – a sharp rise in taxes and a sharp fall in government
spending since the beginning of the year – are undermining economic
performance even more.
Indeed,
recent data have effectively silenced hints by some Federal Reserve
officials that the Fed should begin exiting from its current third (and
indefinite) round of quantitative easing (QE3). Given slow growth, high
unemployment (which has fallen only because discouraged workers are
leaving the labor force), and inflation well below the Fed’s target,
this is no time to start constraining liquidity.
The
problem is that the Fed’s liquidity injections are not creating credit
for the real economy, but rather boosting leverage and risk-taking in
financial markets. The issuance of risky junk bonds under loose
covenants and with excessively low interest rates is increasing; the
stock market is reaching new highs, despite the growth slowdown; and
money is flowing to high-yielding emerging markets.
Even
the periphery of the eurozone is benefiting from the wall of liquidity
unleashed by the Fed, the Bank of Japan, and other major central banks.
With interest rates on government bonds in the US, Japan, the United
Kingdom, Germany, and Switzerland at ridiculously low levels, investors
are on a global quest for yield.
