BUS614: International Finance

Abstract

Unlike the global financial crisis of 2007-2009, the current economic turmoil turns to be more severe and lasting being aggravated by the epidemiological uncertainties. This fact is mainly due to the specifics of the crisis in terms of its main transmission channels (via demand, supply, finance and expectations) and its likely consequences, including technological shift, varying the direction and volume of trade flows, adjustments of structural proportions and relative prices and most of all – socio-cultural change bringing about the increased role of the state and de-globalization deepening. These post-crisis effects and the uncertain prospects of recovery are considered in the article.

The most impressive event of recent decades in the world economy was undoubtedly the global financial crisis of 2007-2009. Then the joint, albeit largely unorthodox efforts of the developed economies, accompanied by massive monetary injections, proved to be sufficient to calm the markets, restore the normal functioning of the payment and credit system and relaunch the temporarily stalled mechanisms of the global economy. Despite major regulatory changes –however, mainly affecting the operating environment of financial companies – the global economy quickly returned to nearly its previous state and even resumed moderate growth.

The economic recovery, which resembled the Latin letter "V" rather than "U", was a strong confirmation of the "spontaneity" of the crisis (largely explained by the "financial perversions"), as well as the evidence of the adequate measures undertaken afterwards. The only, perhaps, symbolic and disturbing reminder of the turmoil were bloated balance sheets and low policy rates of the world's leading central banks. Despite the overall normalization of the situation, they were so terrified by the narrative about the "secular stagnation" that they could not withdraw the policy of "quantitative easing" launched in the crisis (massive purchase of government securities, and, in fact, – "printing money"). In addition, central banks also did not dare to raise interest rates to pre-crisis levels; these rates are stuck in the area of low positive or even negative values. Regulators' behavior is understandable: their old "demon" – inflation, in fact, ceased to pose any serious threat, so formal reasons to change low rate policy – so comfortable to borrowers, financial investors and politicians – were not found. Moreover, Ben Bernanke, head of the Federal Reserve System in 2006-2014, the "author" of the unorthodox set of monetary policy measures, made it clear speaking earlier this year that these now represent a "new normality" and should be used onwards.

But the sustained post-crisis development of the world economy has, apparently, come to an end. Unlike an abrupt breakdown of the past crisis, when the shock impulse created in the financial sphere was transferred to the real sector of the economy, we face a fundamentally different type of crisis. The impact of the coronavirus epidemic will now be so powerful and pervasive that the social and economic systems will make a "quantum leap" in many areas and reverting to the previous state will no longer be possible.

Although the bursts of the previous pandemics (the Spanish flu of 1918, the Asian flu of 1958, the Hong Kong flu of 1968 and SARS of 2002) were mainly characterized by V-shaped post-crisis economic recovery, it is hardly conceivable that the situation will repeat this time. This conclusion is based on the specific character of the course of the crisis and its likely consequences.

Source: Oleg V. Buklemishev, https://populationandeconomics.pensoft.net/article/53295/
This work is licensed under a Creative Commons Attribution 4.0 License.