David Lipton, the first deputy managing director of the International Monetary Fund, says world leaders are less prepared to deal with the next recession than they were during the global financial crisis of 2008.
Speaking to the Financial Times at the American Economic Association annual meeting in Atlanta, Lipton says the current monetary system, based on economic principles that govern interest rate hikes and central banking activities, will be no match for the next recession.
Reports the Financial Times,
“In particular, governments will find it hard to use fiscal or monetary measures to offset the next recession, while the system of cross-border support mechanisms – such as central bank swap lines – has been undermined, warns David Lipton, the first deputy managing director of the IMF.”
Currency swap lines are agreements between two central banks to exchange currencies.
Writes the European Central Bank,
“They allow a central bank to obtain foreign currency liquidity from the central bank that issues it – usually because they need to provide this to domestic commercial banks. For example, the swap line with the Federal Reserve System enables the ECB and all the national central banks in the euro area (Eurosystem) to receive US dollars from the Fed in exchange for an equivalent amount of euro provided to the Federal Reserve. These agreements have been part of central banks’ set of monetary policy instruments for decades.”
The decades-old system is now brushing up against a trifecta of economic concerns: the bearish trend of the US equities markets, the US-China trade war and the Federal Reserve’s grip on monetary policy.
The Dow, which ended November at 25,538, is now down nearly 10% at 23,531.