In recent issues, we’ve pointed out that warnings of a financial meltdown are no longer confined to the fringes of economics, but are coming from elite economists such as Larry Summers, Nouriel Roubini and from institutions such as the BIS and major central banks.
Now comes the most elite warning of all. This article reports that the International Monetary Fund, the IMF, which sits at the top of the global financial pyramid, is now warning of a “financial meltdown” that could come at any time.
Ironically, this projected meltdown is deemed a “side effect” of the extraordinary measures taken to deal with the last meltdown in 2008. At that time, central banks resorted to printing trillions of dollars of new money and holding interest rates at zero for six years.
Since 2014, the Federal Reserve has stopped printing new money and has begun to reduce the money supply and raise interest rates. The problem is that those efforts have not gone very far.
Interest rates are still at 2.25%, whereas they need to be about 5.0% to give the Fed enough room to cut rates to get the economy out of a recession. The money supply is still about $4 trillion, down from $4.4 trillion but still too high to launch more quantitative easing without the risk of destroying confidence in the dollar.
In short, the Fed and other central banks are not in a position to deal with a recession or panic should one arise in the near future. Of course, central banks would not be in this position if they had not conducted a massive monetary experiment from 2008–2014 with markets and investors as the guinea pigs.
The implication is that the Fed should have left markets alone in 2008 but for emergency liquidity. In that case, the recession would have been over sooner and we’d be in better shape today for a new recession.
Yesterday’s paper-money solution to the crisis has set the world up for a new crisis to which there is no easy solution. Even the IMF agrees.
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