An unprecedented crisis has gripped the world. The global economy is struggling with medical crisis, economic crisis and financial crisis at the same time. While the best brains in the medical fraternity have stepped forward to fight the medical crisis, governments and central banks are stepping in to manage the economic and financial crisis.
The Street is estimating that Covid-19 will reduce global GDP from $85 trillion to $73 trillion. Governments and central banks have announced stimulus packages of almost equal magnitude to support global growth. Globally, we are seeing highest liquidity and lowest interest rates. Investors are learning to live with low to negative interest rates and savers are learning to live with negative real interest rates in most parts of the world.
Governments and central banks have learned from the 1929 experience when inadequate support, lack of urgency and early withdrawal of monetary and fiscal support resulted in the Great Depression. They would like to avoid the same at all costs.
The world seems to be following Japan, where liquidity has been kept surplus, interest rates have been cut to near zero levels and equity has been bought in droves without worrying about the debt to GDP ratio. These measures have failed to put the Japanese economy on the growth path but the world seems to be copying the model.
This story is from the August 23, 2020 edition of Business Today.
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This story is from the August 23, 2020 edition of Business Today.
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