Higher public debt levels, interest rate hikes, and subpar Chinese economic growth rates are the major risks to the world economy.

Daphne Basel

2019-01-23 11:32:00 Wed ET

Higher public debt levels, global interest rate hikes, and subpar Chinese economic growth rates are the major risks to the world economy from 2019 to 2020. American public debt now hovers around $15 trillion with another $6 trillion intragovernmental debt positions. This debt dilemma poses a core conceptual challenge to the Trump administration that may need to carry out counter-cyclical fiscal policies to contain the next economic recession. With $1.5 trillion infrastructure expenditures and $1 trillion tax cuts, the Trump administration faces a hefty $800 billion fiscal deficit. As the Treasury funds the fiscal deficit with incessant government bond issuance, the Federal Reserve has to raise seigniorage taxes in the form of higher money supply growth. In turn, this money supply growth causes higher prices as inflation surges beyond the 2%-2.5% target threshold. The current U.S. Phillips curve remains flat and thus reflects low inflation and low unemployment. In accordance with the dual mandate of price stability and maximum employment, the Federal Reserve should continue the gradual interest rate hike at a slower pace. The U.S. financial history suggests that unforeseen asset market surprises can cause key capital investment retrenchment as the government fails to implement counter-cyclical fiscal policies in time.

Moreover, Chinese real GDP economic growth can decline from 6.5%-7% to 5.5%-6%. As the Chinese Xi administration continues to decentralize the consumer-led economy, this transition translates into lower demand for international goods and services. With the primary focus on exports and real estate investments, China may cause inadvertent contractionary spillovers into several East Asian countries and some western open economies. U.S. households and firms may face higher costs of tradable goods and services as the Chinese economy experiences subpar economic growth. However, the latter may be a minor concern in light of the likely Sino-U.S. trade war resolution.

On balance, the U.S. Federal Reserve needs to better align medium-term interest rate adjustments with fiscal expectations between the White House and Treasury. Optimal interest rate decisions may need to react to productivity surprises, inflation expectations, economic output gaps, and asset price gyrations. To the extent that macroeconomic fluctuations manifest in credit conditions and corporate profits, the central bank has to consider conservative interest rate increases. From Australia, Britain, and Canada to Germany and Japan, international monetary policies may start to follow the current U.S. interest rate hike. The new global interest rate cycle can be especially pertinent for European and East Asian small open economies.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More
President Trump applies an increasingly bellicose stance toward the Iranian leader Hassan Rouhani.
Jacob Miramar

2018-08-09 16:36:00 Thursday ET

President Trump applies an increasingly bellicose stance toward the Iranian leader Hassan Rouhani.

President Trump applies an increasingly bellicose stance toward the Iranian leader Hassan Rouhani as he rejects a global agreement to curb Iran's nuclea

+See More
CNBC's business anchorwoman Becky Quick interviews Nobel Laureate Joseph Stiglitz on the current Sino-U.S. trade war.
Daisy Harvey

2018-03-27 07:33:00 Tuesday ET

CNBC's business anchorwoman Becky Quick interviews Nobel Laureate Joseph Stiglitz on the current Sino-U.S. trade war.

CNBC's business anchorwoman Becky Quick interviews Nobel Laureate Joseph Stiglitz on the current trade war between America and China. As America imposes

+See More
Apple revises down its global sales revenue estimate to $83 billion due to subpar smartphone sales in China.
James Campbell

2019-01-09 07:33:00 Wednesday ET

Apple revises down its global sales revenue estimate to $83 billion due to subpar smartphone sales in China.

Apple revises down its global sales revenue estimate to $83 billion due to subpar smartphone sales in China. Apple CEO Tim Cook points out the fact that he

+See More
The Economist offers a special report that the new normal state of economic affairs shines fresh light on the division of labor between central banks and governments.
Jonah Whanau

2019-11-15 13:34:00 Friday ET

The Economist offers a special report that the new normal state of economic affairs shines fresh light on the division of labor between central banks and governments.

The Economist offers a special report that the new normal state of economic affairs shines fresh light on the division of labor between central banks and go

+See More
President Trump targets Amazon in his call for U.S. Postal Service to charge higher delivery prices on the ecommerce giant.
Laura Hermes

2018-01-03 08:38:00 Wednesday ET

President Trump targets Amazon in his call for U.S. Postal Service to charge higher delivery prices on the ecommerce giant.

President Trump targets Amazon in his call for U.S. Postal Service to charge high delivery prices on the ecommerce giant. Trump picks another fight with an

+See More
Agile business firms beat the odds by building faster institutional reflexes to anticipate plausible economic scenarios.
Fiona Sydney

2020-09-03 10:26:00 Thursday ET

Agile business firms beat the odds by building faster institutional reflexes to anticipate plausible economic scenarios.

Agile business firms beat the odds by building faster institutional reflexes to anticipate plausible economic scenarios. Christopher Worley, Thomas Willi

+See More