The International Economic Governance is in Confusion as was Apparent from the Acrimony Over Monetary and Currency Policies at the Annual Meeting of IMF

America tried to get support from IMF to get the exchange rates realigned and to see that the renminbi was appreciated following the reserve accumulation of China. The Chinese on the other hand accused America of destabilizing the newly emerging economies by permitting a monetary policy that was ultra-loose causing the emerging countries to be flooded with money. The net outcome was that there was hardly any agreement on what should be done to pull the world out of a stagnant situation.

There is growing proof that the much hyped recovery from 2008 Great Recession is yet to make its presence felt and the unemployment in the developed countries remain at alarming levels. Meanwhile there is no general agreement about how to solve the problem.

The governments in the developed world are now overcome by “stimulus fatigue”. They have used up a good part of funds that could have narrowed the budget deficit to bail out financial entities. In the process they have accumulated new debts. Now there is skepticism about solving this by further stimulus.

The push towards recovery is now pushing two ways. One path being followed is “quantitative easing” or the pumping into the system liquidity by lending from the central banks – significantly from the Federal Reserve of USA at interest rates that are hovering around zero. The second path is it put pressure on the emerging economies of the world, with special attention to China, to allow their rates of exchange to appreciate hoping that this will allow expansion of exports of America and simultaneously reduce the import from these countries to help recovery.

The concurrent promoting of these two alternatives is a sure ingredient for conflict. It is generally believed that pumping of cheap money into the financial system of developed countries results in the firms borrowing cheaply from their native country and investing it in the emerging world netting in handsome profits. Little contribution is made towards the domestic economic recovery. Meanwhile the emerging world is seeing an unprecedented flow of capital that is triggering booming speculation in the stock market and also in the real estate segment. To expect they would further appreciate their currencies would be ridiculous. Brazil for instance has taken many measures to absorb this inflow of extra foreign funds but not been able to stop the appreciation of its currencies.

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