As things have started to work just fine, global markets were suddenly hit by China coronavirus outbreak. As a matter of fact, this is the first time a virus outbreaks takes place in the “global risks threatening the markets” list. As I have often mentioned in my previous reports, premature deaths that are globally linked to ambient air pollution and communicable diseases are not present in this list even though their occurrence is 20 times higher than the total number of premature deaths caused by armed conflicts and war.
Last week, global markets were hit by a sense of enervation caused by this coronavirus outbreak, leading to a huge decline in oil prices, and stock markets, while gold price starting to go up, taking advantage of the situation. Although decreasing oil prices is good news for Turkey, the fact that there is even a greater panic around the globe than it has been when the world was hit by SARS and other virus outbreaks would eventually affect Turkey not in a good way.
Amidst all the chaos, the fact that Brexit deal has become law with approval from Queen Elizabeth II, and that there’s now no chance of impeached Trump getting removed do not go unnoticed either. However, we’ll get to see whether these developments will yield any positive results once this chaos is over.
“Fed decisions through the dust and chaos…”
The Fed is to release its rate decision by the end of the week while Trumps keeps insisting that rates should be cut. Although reducing the cost of funding seems like the only solution as it’s not currently possible for the Fiscal Policy to provide any sort of support, there have been examples in the past where negative real interest rate did not work out so well for the economies of the world countries.
In the 1970s, McKinnon and Shaw HAD developed a hypothesis where they had argued positive real interest rate would both help increase savings and encourage investment. Back then, the Banking System has been offering “negative real interest rate” and it has been thought that this practice wasn’t effective enough as it put too much pressure on financial and real markets.
Considering the rapid growth of financial markets, real economy and finally all economies, we can argue that arguments or evidence that have been set forth to prove this hypothesis wrong so far are not actually accurate. A particular aspect of the hypothesis where it claims that it will help increase savings seems to have failed. But the interesting thing is that I, the “liberal economist”, who discussed this theoretical framework in my PhD thesis, happen to agree with Prof. Dr. Erinç Yeldan who has an entirely different take on this matter, which means we both have difficulty in believing that positive real interest can actually help savings increase in all groups of the society.
So, as the coronavirus outbreak in China sends the world into frenzy, it can be seen that more and more people are questioning the “positive real interest rate”, one of the essential features of the capitalist system.