Unconventional monetary policies 'to aggravate economic crisis'

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From Fazle Rashid
NEW YORK, June 04: A day after Germany's Chancellor Angela Merkel rebuked the US Federal Reserve, Bank of England and European Central Bank (ECB) for pursuing unconventional monetary policies that she warned could aggravate the economic crisis rather ease it prompted regulators and officials in the US to express similar anxieties.
"We must return to independent and sensible monetary policies otherwise we will be back to where we are now in ten years", German Chancellor was quoted as saying.
The governments that are trying to spend their way out of recessions can find themselves in the uncomfortable position of paying higher interest rates on their rapidly expanding debt. Increased rates could translate into hundreds of billions of dollars more in government spending, the New York Times (NYT) in a report said. This will naturally put tremendous pressure on other government spending.
"It will be more expensive for everybody", Oliver Blanchard, chief economist of the International Monetary Fund (IMF) was quoted as saying. "As government borrowing in the world increases interest rates will go up. We are already starting to see it", Blanchard said..
The US government plans to provide more than $5.0 trillion in new debts in 2009 and 2010. A decade from now government's outstanding debts could equal 82 per cent of gross domestic product (DP) or just over $17 trillion, the NYT said quoting Congressional Budget Office. The total interest payments by the federal government could rise to a whopping $806 billion in 2019 from $170 billion in 2009.A fearful prospect not only for the US but for the entire global economy.
The US federal budget deficit this year will reach $1.8 trillion. The United States need to develop a plan to restore fiscal balances. "Unless we demonstrate a strong commitment to fiscal sustainability in the longer term we will have neither financial stability nor healthy economic growth", US Fed Reserve Chairman Ben Bernanke was quoted as saying.
Government could not continue to borrow indefinitely at the current rate to bridge the shortfall, he said. Bernanke said there are numerous flickers of stability and growth in economy but hastened to warn that there is no hope of swift recovery.
Meanwhile, the National Bureau of Economic Research which decides when recession begins and end has not even begun discussing the end date and will probably not reach a verdict before 18 months or more, a reputed paper said. The number of corporate bankruptcies will surge by 35 per cent this year , turning the world economy into a " burial ground ' for business a credit insurer was quoted by the same paper as saying. This forecast will obviously dampen the spirit of those who are beginning to see " light at the end of the tunnel"
The rate of the corporate collapse will reach historic highs in 2009, underlining the brutality of the global economic meltdown. "We are looking at a burial ground for companies everywhere in the world until the end of 2009", a study by Euler Hermes, a credit insurer said. Business collapse in the US surged by 54 per cent in 2008.
On the political front, the main topic is the historic visit of President Obama to the Middle East with the primordial aim of repairing the damaged ties of America with the Muslim world. Obama has pledged a new face and tone to relations between America and the Muslim world. President Obama will deliver his much vaunted speech today. The expectation is that he will try to re-arrange the relations with the Muslim world and fight terrorism in a more national way. People expect more than Obama expressing greatness of Islamic civilisation.
Obama's call for a freeze on Israeli settlements in the West Bank and his insistence on two state solution to the Palestinian-Israeli conflict have raised expectation despite Israel's stubborn refusal to end settlement.
In Europe, Britain is in the grip of two major crises, economic and political. Prime Minister Gordon Brown faces tough and rough time ahead as four ministers resigned yesterday. Britain's ruling Labour Party faces the prospect of a disastrous results in local and European polls today.