Living With Turbulence

The global economic recovery has stalled and risk aversion has heightened once again. The impact on Indian markets has come in the form of foreign institutional investors (FIIs) withdrawing a humongous Rs 8,898.9 crore in August from India and the Sensex taking a (-) 9.9 per cent tumble (till August 23). Globally there has been a flight to safe-haven instruments such as the 10-year US treasury bond, whose yield has fallen (to about 2.1 per cent), and gold, whose price has soared to `28,000-plus (per 10 grams). After the Lehman Brothers collapse in 2008, the US government and the Fed had swung into action, rescuing financial institutions that were deemed too big to be allowed to fail. Then there followed a fiscal stimulus package, tax cuts and two quantitative easing programmes. What makes the current crisis frightening is that all magic bullets (fiscal stimulus, low interest rates, quantitative easing) have been tried and found wanting. Policymakers now appear to be groping in the dark for options. No quick recovery The first inkling that the US economy was in far worse shape than previously thought came on July 29, when the advance estimate for Q2 came in at a meagre 1.3 per cent. Even more disappointing was the news that the Q1 figure had been revised downward drastically from 1.9 per cent to just 0.4 per cent. The trend rate of growth (long-term historical average since 1948) for the US economy is 3.25 per cent. In the third year since the onset of the crisis growth is likely to be much below trend level. Estimates of a 2.5 and 2.6 per cent growth in 2011 by IMF and World Bank respectively will now have to be scaled downward. Nouriel Roubini, professor of economics at New York University’s Stern School of Business, popularly known as D

This article was originally published on September 22, 2011.