Germán G. Creamer: Effects of the monetary contraction in the US | Columnists | Opinion

The United States Central Bank (Fed) has decided to increase interest rates at a higher rate than expected and simultaneously reduce its portfolio of almost $ 9 trillion of bonds and other financial assets, which has more than doubled since the beginning of the 2020. It is expected that in March, and not in June, the asset purchase program will be completed. These contractionary monetary measures are due to the fact that inflation has exceeded its initial goal of 2%, and the unemployment rate of 4.2% is very close to the 4% goal. In other words, the Fed prioritizes the control of inflation over the growth of the economy.

The stock market contracted upon learning of this decision. However, this reaction is speculative since the market had already incorporated these movements into the price of financial assets and Jeremy Powell, the Fed manager, anticipated these decisions in December, although the adjustment period has been shortened. The main question is whether it is possible that the American stock market has reached its maximum level and would contract or maintain an upward trend.

A very simple indicator is the Shiller price / earnings ratio proposed by the Nobel laureate in economics Robert Shiller. The median of this indicator has been between 15 and 16 in more than the last 100 years, so significantly higher values ​​can anticipate a financial crisis. This value reached 44.19 in December 1999 during the dotcom crisis, 30 on Black Tuesday when the market fell in 1929 and 39.43 on January 5 of this year. According to this measure, a significant correction in the market would be expected.

Another perspective is what is known as the Minsky moment, which implies that asset prices collapse and interest rates on subprime loans rise significantly after a prolonged period of speculative market activity. This is what happened in the financial crisis of 2008. Currently, real estate prices have exceeded 2006 highs and global debt in the second quarter of 2021 reached $ 300 trillion, a value higher than debt in September 2008 when Lehman Brothers collapsed. Additionally, emerging economies, which represent half of the world economy, have significantly increased their indebtedness at low rates to get out of the crisis generated by the pandemic, but with the risk that the debt will be unpayable.

On the other hand, the great innovation of technology companies in real and virtual space (metaverse), the development of the digital economy, as well as the greater capacity of the financial system to face a crisis suggest that financial market valuations can be maintained. However, the crisis could start in other parts of the world, such as a possible bankruptcy of China Evergrande Group, the real estate management company with the largest debt in the world. Hence the importance of Latin American countries, especially those highly dependent on the dollar, to strengthen their risk systems in the face of possible instability in the global financial system. (OR)

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Germán G. Creamer: Effects of the monetary contraction in the US | Columnists | Opinion