By Divya Shukla
For the third time this year, the capital markets have got a breather from the west. The first such instance took place on New Years, when US averted the fiscal cliff. After that, policy-makers throughout the year and all over the world had been busy taking measures in order to bring their respective economies back on the growth trajectory. In this process, we almost neglected the impending threat of the burgeoning federal budget of the worlds largest economy. Dangers of the possible tapering of the third round of quantitative easing had frenzied the markets all throughout the month of September. Now, as we are heading towards the monetary stance of October, in both the East and the West, there is a general consensus of quantitative tapering beginning early next year. However, for now, due to fresh doubts cast on the sustainability of the recent turnaround observed in US, QE3 taper is too distant a possibility.
There was a global cue that recession finally has come to an end, and the developed world is now finally getting back on track. Obamacare fanned the fire around the US Budget deficit, planting fresh fears of a debt crisis that will create havoc in the world. No doubt, it was least expected that political crisis would turn a blind eye to the vulnerability of nations. Even analysts commented that if at all US defaults, it will be engulfing the whole world with it resulting in a depression, predicted to be even worse than the Great Depression of the 1930s. So, just the day before the deadline to raise the debt-ceiling (i.e.17th Oct.), bourses all over the world rallied at the news from Washington D.C.
If we look at the positive side of the decision, we now have full four months in hand, to set things back in order. Obviously, now QE3 is perhaps going to stay at the least till February. There will be liquidity in the markets, lubricating the passage of capital flows. We have more time to plan things out and build a protective shield against the ill-effects of the taper (whenever it begins). It is these hopes that made the markets zoom.
But, the other side of the picture which gives us goosebumps is the dangers of the looming crisis next year. The gaping wounds from the Great Recession are not yet healed; Europe is still seen to be struggling to get out of the clutches of the debt-crisis. Furthermore, US default could be a major setback for the general assumption of US DEFAULT-FREE BRAND. If the economy does well by maximizing their growth potential US default-free image could be sustained. It is a well-known fact that US has a monarchy on its political and economic significance in the world, the whole world is staring at them right now. There is too much sensitivity on whatever steps US takes, and any negative news from their side will only spread the contagion. So, whether the crisis has been averted or not can only be determined next year.
A graduate with a Major in Economics degree from the renowned University of Delhi and is about to enroll for Masters program in Financial Economics in Babasaheb Bhim Rao Ambedkar University, Lucknow. Whilst this journey of financial economics is a career path, has also developed a diverse field of interests, (especially in Economics, Politics, and Finance).