World economy “defying gravity” – World Socialist Web Site

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So far, the global economy appears to have dodged a bullet. Predictions of a recession due to interest rate hikes by the world’s major central banks have not materialized. But there are warnings that more and more problems exist beneath the surface, and not far below, and that the current situation is not sustainable.

A man wearing a protective mask walks in front of an electronic display board in the lobby of the Shanghai Stock Exchange building, China, Friday, February 14, 2020. (AP photo)

This was the theme of an editorial in the Economist magazine published this weekend under the title: “The global economy defies gravity. That cannot continue.” In a reference to the cartoon character of the roadrunner, some commentators have called it a Wile E. Coyote moment.

Even as wars rage and the geopolitical climate darkens, it began, “the global economy has been an unstoppable source of cheer.”

According to the magazine, the US economy advanced by 4.9 percent on an annual basis in the fourth quarter, inflation is falling, central banks may have stopped tightening interest rates and China, due to a real estate crisis, appears to be about to take advantage of this. of a modest incentive.

“Unfortunately,” the message continued, “this good cheer cannot last. The foundations for current growth appear unstable. If you look ahead, there are many threats.”

Citing the rapid rise in interest rates, one of the sharpest in decades, the editorial noted that the U.S. government now had to pay 5 percent to borrow for 30 years, compared to just 1.2 percent during the COVID recession. 19 pandemic. Not so long ago, German borrowing costs were negative but were now close to 3 percent, and even the Bank of Japan had all but given up on its pledge to keep borrowing costs at 1 percent.

The editorial directly addressed US Treasury Secretary Janet Yellen’s recent comments that higher interest rates were a good thing because they reflected a healthy economy.

“In fact, they are a source of danger. Because higher interest rates are likely to continue, current economic policies will fail, and so will the growth they have promoted.”

The Economist argued, like others, that one reason the U.S. economy has done better than expected is that consumers have spent the money accumulated during the pandemic and there is still $1 trillion in “excess savings” left.

Once that ran out, interest rates would ‘start to bite’ and problems would arise throughout the global economy as interest rates stayed higher for longer.

Corporate bankruptcies began to rise in the US and Europe, with companies that maintained low interest rates eventually facing rising financing costs. Higher mortgage costs would affect house prices. Banks that hold long-term securities (whose values ​​have fallen) should take action to “plug the holes in their balance sheets left by higher interest rates.”

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