Global economy - Global economy: That elusive spark By...

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Global economy: That elusive spark By Chris Giles Published: October 5 2010 20:54 | Last updated: October 5 2010 20:54 Having tried both standard and unorthodox measures to stimulate demand, central bankers and finance ministers faced with a stuttering recovery are left with few options More FT video The year has not gone to plan. Policymakers thought that, having prevented economic implosion back in 2008, they would by now be plotting an exit from emergency measures rather than worrying again about boosting demand. But recent data indicate the global recovery is slowing after an initially rapid recovery. Output in the west is still far below pre-2008 trends. Stubbornly high US unemployment is blighting lives and souring politics. Europe narrowly avoided sparking a second worldwide crisis in May when its big economies agreed a bail-out fund for Greece and other highly indebted countries at risk of sovereign default. Japan has intervened in currency markets for the first time in six years to stop an appreciation of the yen hurting its exports. More FT video This has sparked dark talk of a global “currency war” . Charles Dallara, managing director of the Institute of International Finance, representing the world’s largest banks, sees the world as approaching a moment as critical as the depth of the global recession in early 2009. “Urgent action is needed to arrest the disturbing trend towards unilateral moves on macroeconomic, trade and currency issues,” he said this week. It is not an auspicious backdrop to the annual Washington jamboree of finance ministers and central bankers . The question this weekend is whether additional measures are necessary. And, if so, what tools to foster faster growth remain in the kit? Monetary policy The use of the authorities’ powers in financial markets to influence interest rates and the relative appeal of borrowing, spending and saving The principle Monetary policy is the standard tool used to keep demand pegged as closely as possible to an economy’s sustainable level of output. If interest rates are too high, spending will fall short and leave people unemployed and machines idle. Companies in competitive markets will then cut prices and employees accept lower wages, which can lead to deflation – a generalised fall in prices. Cutting rates reduces the return on savings and the cost of borrowing, encouraging households and companies to spend more today and boosting economic output. But if further stimulus is needed when interest rates are already close to zero, as in advanced economies, policymakers have little choice but to reach for unorthodox monetary policy tools. Video: Cyberwarfare and the economic toolbox
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Global economy - Global economy: That elusive spark By...

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