Over the past 15 years, the world has been at risk of recession twice, first after the 2008 financial crisis, and second after the coronavirus pandemic, but survived both thanks to central banks. Said an analysis on CNN.
But this credit does not preclude that the tricks that central banks used to restore confidence and maintain the flow of money between banks and the economy were extremely risky that it is impossible to escape the consequences of destabilizing the global financial system.
Central banks used the « quantitative easing » or QE trick, simply buying government bonds and other assets worth tens of trillions of dollars. The aim was to try to reduce borrowing costs in the long term and stimulate the economy.
But this solution created a huge wave of cheap cash and gifted policymakers with a new influence on the markets, which many investors call « the era of easy money ».
Now it’s time to pay the bill. After inflation reached its highest level in the past year. Central banks began to move on a massive scale by selling securities and seeking to wipe them off their books. This is referred to as « Quantitative tightening » or QT.
This massive collective action
will cause $2 trillion of liquidity from the financial system to be consumed over the next two years. Fitch also reported.
The impact? Extracting $2 trillion from the financial system can amplify pressures on the banking system and markets, which are already suffering from sharp rises in interest rates and fewer enthusiastic investors.
This scenario placed us in an unknown zone, the reason for these consequences is probably the continuation of the « quantitative tightening ». Former Reserve Bank of India Governor Raghuram Rajan warned in his paper on these risks.
No one knows where further withdrawal of liquidity from the financial system will lead. Analysis said.
Liquidity demand is on the rise and it is difficult to disassociate the financial system from that, as QE has become an addiction. Rajan also described the current economic situation.
However, central banks reassure everyone that they are taking a progressive and predictable approach to QT to reduce financial turmoil.
Not only investors are at risk because of QT, but politicians must also realize the commercial paradigm shift and the evidence is what happened in the September crisis in Britain.
At a time when levels of government debt have increased dramatically over the past years, the willingness of central banks to buy large parts of it caused a reduction in debt service, but governments now find themselves in an urgent need to actively search for new buyers to revive their hopes of financing projects or green investment measures to digitize the economy.