central banks’ Hamletic doubt brings citizens to their knees

Central banks are increasingly doubtful about the path to follow.

On the one hand we must avoid that inflation worse but on the other hand we must also avoid the danger of the recession that could blow up the world economy.

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Let’s try to understand what is happening and what the risks are. Central banks have during the covid pandemic kept interest rates at zero in order to encourage economic recovery.

The doubt of the central banks

In fact, world production was largely blocked during the covid pandemic and the best way to get it started was to keep interest rates at zero.

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The zero rates are an ideal condition for the economy and in fact this has made both the stock market and the real economy restart with momentum. It was therefore an emergency move but it worked. The problem is that zero rates have been held for too long and this laid the foundation for the very strong inflation. Inflation was not only caused by central banks but also by the disorderly resumption of production.

Inflation and recession

Industrial production has begun to march again but many materials raw materials were not yet available and clearly their prices have begun to rise. However, the blame that many now attribute to central banks was not so much that of initially keeping rates at zero but not to have increased them as soon as this extreme measure could be at least partially revoked. In fact, even when the high inflation started, the central banks did nothing and continued to to argue that high inflation was a trivial and transitory phenomenon. For months the central banks could have raised rates but continued to keep them at zero and this increased inflation to the current Italian 8%. In short, very high inflation was created and only a few months ago the central banks decided to raise rates again. According to many observers, the rate hike was too late and too mild.

The real estate bubble

However the problem is that just by increasing the rates central banks risk plunging the world economy into recession. Already today there are many signs that suggest the recession. The fear expressed by many is that the increase in rates may lead to the same the economic recession but also a sort of bursting of the housing bubble. So today the risk is that recession and high inflation will arrive at the same time. In short, for the world economy, some really hard years could loom and already in the autumn the economic situation for Italy could become heavier.

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About Eric Wilson

The variety offered by video games never ceases to amaze him. He loves OutRun's drifting as well as the contemplative walks of Dear Esther. Immersing himself in other worlds is an incomparable feeling for him: he understood it by playing for the first time in Shenmue.

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