Can the Upcoming Recession be worse than 2008?

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Thomas John, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

_______________________________________________________________

The inevitable, and by all accounts brutal forthcoming recession, can coincide with two extremely dangerous conditions that will make it worse than 2008.
 
First, the Fed won’t be ready to lower interest rates and supply any debt-service relief for the economy. In the wake of 2008 Recession, former Fed Chair Ben Bernanke took the overnight interbank loaning rate all the way down to 0 % from 5.25 % and printed $3.7 trillion. The Fed bought longer-term debt so as to push mortgages and every other debt to record low.
 
The best the Fed will be able to do is take to away its .25 % rate hike created in Dec.
 
Second, the federal government increased publicly-traded debt by $8.5 trillion (an increase of a hundred and seventy percent), and ran $1.5 trillion deficits to spice up consumption through transfer payments. Another such increase in deficits and debt, would cause an interest-rate spike that may flip this next recession into a devastating depression.
 
So as to avoid the surging value of debt-service payments on both public and private-sector level, the Fed will feel compelled to launch large number of bond purchases. However, not only are the interest rates already at historic lows, but faith in the ability of central banks to provide sustainable  gross domestic product growth will have already been destroyed, given their unsuccessful eight-year experiment in QE.
 
Therefore, the ability of government to save the markets and also the economy this time will be extremely difficult, if not impossible. 
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s