Today, I’m going to talk about the impacts of monetary expansion and rate cuts in the United States. Here’s an interesting analysis for you.
A research conducted by Oxford Economics/Harver Analytics tells us the results of “monetary expansion” measures taken to overcome global recessions since World War II.
According to the research, monetary expansion steps implemented after a total of 8 recessions that have occurred between the years of 1950 and 1998 lasted a maximum of 5 years, while monetary expansion steps implemented after 1997-1998 and 2008-2009 financial crises lasted 120-1250 months, in other words for a period of 10 years.
This analysis helps us understand why stock markets that were gathering strength towards the end of 2009 made people earn a lot of US dollar-denominated money. It looks like a serious monetary expansion and the resulting sharp decline in interest rates had yielded some good and bad outcomes. I may even call them ‘side effects’.
“Cheap money made the business world crazy…”
As Powell indicated in a recent speech, the fact that companies finds the opportunity to borrow cheap loans has weakened their ability to make profit and compete with other companies. Even though they don’t exactly avoid bothering themselves since there are a lot cheap loans available, their competitive behaviour has somehow regressed.
Actually, China has gone into that sluggishness as well, but then Chinese economy found the power to pull itself together. We used to read in the news that non-performing loans in China had reached 450 billion USD. This figure, however, remained unconfirmed. Having finally understood that this was not the way to go, Chinese President decided to implement an overall revision of the system. Meanwhile, he did not forget to approve the removal of the term limit on the presidency, allowing him to remain in power for life. Nevertheless, this act was the first building stone for Chinese economy on its path towards achieving a better performance than the US economy.
The analysis also shows us that the growth rates, the end results of monetary expansions put into action to beat global recessions, have gradually declined over the years. This may be related to the fact that GDP in the United States back then wasn’t large enough as today.
In short, while it takes longer and longer for the US economy to escape recession, the effectiveness of these anti-recession measures seem to remain ineffective, interestingly, despite the emergence of breakthrough technologies and the massive value they add to economy.