End of Cheap Money: Can the World Handle Higher Interest Rates?

End of Cheap Money: Can the World Handle Higher Interest Rates?

(from spiegel.de source Martin Hesse, Anne Seith and Wieland Wagner:)

“But investors are worried about withdrawal. They wonder whether the economies in the United States, Europe and Japan are robust enough to manage without cash infusions, or even with a somewhat reduced dosage. When the financial crisis escalated in 2008, the Fed, the European Central Bank and other central banks began their cash therapy. Almost in lockstep, they reduced prime rates to close to zero and began buying up bonds on a large scale. To this day, the leading central banks have inflated their balance sheets with such practices to $10 trillion (€7.5 trillion). But now something is changing. “For the first time, it looks as though one country, namely the United States, is leaving the crisis behind,” says Ulrich Kater, chief economist at DekaBank. “And, also for the first time, a central bank, the Fed, is showing that it is thinking about normalization.””

It may not be a risky move, at the least moving to 0.5 to equalize with EC and UK, possibly Japan should do the same, doubling their monetary mass is more than sufficient to avoid liquidity issues, the 0.4 increase on prime rate should not cause problems.

With the same prime rate in ‘all the western world’ it should appear more visible where the problems are, and the move may make not convenient neither to keep capitals in Europe nor to borrow in Europe, and a side effect could be a ‘market driven’ loss of value of the Euro, which could give some oxygen to ‘real economy’ of the Eurozone, and confidence to the ECB to start a process of revision of the whole Euro area, principally towards structural issues of the banking systems of the Eurozone, and the need of reducing inefficient debt in the periphery of the EU, while at the same time stimulating with EU central QE and lending, structural investments towards more modern and realistic targets.

At the worse, if it does not work, there is always the option of reversing it very quickly from the side of the US.


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