The world economy is headed for a difficult year, as the fallout from the recent banking crises and the formation of rival economic blocs triggered by the Ukraine conflict threaten to undermine global economic stability, the head of the International Monetary Fund (IMF), Kristalina Georgieva, said at the China Development Forum on Saturday.
According to Georgieva, 2023 will be “challenging” and is likely to see global growth slowing to below 3% “as scarring from the pandemic, the war in Ukraine, and monetary tightening weigh on economic activity.”
“Uncertainties are exceptionally high, including because of risks of geo-economic fragmentation which could mean a world split into rival economic blocs – a ‘dangerous division’ that would leave everyone poorer and less secure. Together, these factors mean that the outlook for the global economy over the medium-term is likely to remain weak,” she warned.
Georgieva also noted that the recent troubles in the banking sector, from the collapse of several lenders in the US to the near-insolvency of Switzerland’s second-largest bank, Credit Suisse, exposed vulnerabilities in the global financial system, which will need to be addressed as the year progresses.
“Risks to financial stability have increased. At a time of higher debt levels, the rapid transition from a prolonged period of low interest rates to much higher rates – necessary to fight inflation – inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies.”
Georgieva praised the recent efforts of policymakers to support the global banking system by enhancing the provision of US dollar liquidity, saying they “have acted decisively in response to financial stability risks.” She noted, however, that the measures have only “eased market stress to some extent, but uncertainty is high, which underscores the need for vigilance.”
Georgieva noted, however, that the outlook for the global economy is not “all bad.”
“We can see some ‘green shoots’, including in China. Here the economy is seeing a strong rebound, and the IMF’s January forecast puts GDP growth at 5.2% this year… Driving this growth is the anticipated rebound of private consumption as the economy has reopened and activity has normalized,” she stated. The IMF head added that China is set to account for around one third of global growth in 2023, which would give “a welcome lift to the world economy.”
“And beyond the direct contribution to global growth, our analysis shows that a 1% increase in GDP growth in China leads to 0.3% increase in growth in other Asian economies, on average – a welcome boost.”
Governments always want to spend more than they have earned. Each Government Treasury borrows money using its future national earnings as collateral. So Governments issue Treasury Notes to big banks to take the money in the hands of the banks, and give the banks some debt-certificates. The debt-certificates are called Treasury Notes, they would be exchangeable for predetermined amounts of real fiat money on or after their maturity dates.
This is the idea of Treasury Notes, Treasury Bonds.
Anti-corruption requires that the bidding process for the interest rates of Treasury Notes be public and transparent. If the auction price for interest rate is $30/year of for $1000 of borroed money then the Treasury Note rate is 30/1000 or 3.0% per annum.
In practice, instead of auctioning for interest rates, auctions are made for the sale of Treasury Notes which would be redemable for predetermined amount of real fiat money after some future dates. For a Treasury note at 3% maturing in 10 years, its auction price will be (97%)^10 = (97%)*(97%)*…*(97%) = 0.73742 of its value on redemption. In this way, the buyer of a $1000 Treasury Note would pay $737.42 and he would redeem it for $1000 at maturity and there is no need for him to collect yearly interests from some government office.
After the auction, the transferable T-Bonds may also be available for resale on the financial market. Initially it was bought at auction for $737.42 and subsequently its value may drift up or down but after redemption day it will be worth exactly $1000 (Its face value.).
Its value at any intermediate time is the worth of a Treasury note redeemable on the same day at the prevailing interest rate.
As a second example, a bond that will become $100,000 in 5 year time will be bought for less than $100,000. Otherwise prospective buyers would not bother and they only need to put their own $100,000 in own safes for 5 years. If it was bought at $95000 then $95000 would earn $5000 as compound interest in 5 years. The interest rate would be:
The rule of supply and demand applies. If there were too many of those bonds, their prices would come down and so the interest rates would go up. When there were too many Treasury Notes and Mortgage Backed Securities, their prices would fall down. The price became even lower if people anticipate that there would be still more additional Treasury Notes coming to the market.
A $1000 bond has 9 years left. The economy has decided to have a 0.01% interest rate continuing past the redemption date.
If interest rate is set at 0.01%, the present value of the bond is worth nearly
(99,99%)^9 X $1000 = $999.1003599,
Irrespective of the original purchase price, the T-Note holder can sell it for $999.10.
It has been US government practice to always keep the US government in debt with Treasury bonds. There has been no plan to ever free the US from debts.
It would be alright if the debts are spread to ordinary US citizen. In reality, the debts are concentrated to only a handful of billionaires. The indebtedness to a handful of them may threaten the democracy of the US and these lenders have now extended their grip into another scheme for skimming national wealth called Quantitative Easing.
Central banks slashed interest rates during the 2008 global financial crisis and again when the pandemic hit in 2020 as part of efforts to encourage economic growth.
In such QE operation, governments issued the longest maturity date Treasury Notes, Treasury Bonds to get cash to buy nearly matured Treasury Notes, Treasury Bonds. This results in nearly zero short term interest rates and high long term interest rates.
The outstanding debts increased significantly after each QE as the Treasury bought notes and bonds near maturity at nearly face value with the money obtained by selling bonds maturing much later with far higher amounts of face values. This is seen in the graph at 2008 and 2019-2022.
Quantitative Easing is simply a (well obfuscated) massive temporary borrowing of fiat money (with a promise of future repayment) and that amount of borrowed fiat money would be only for exclusive purchase of Treasury Notes and Mortgage Backed Securities to manipulate the interest rates of subsequent borrowings (at subsequent auctions of Treasury Notes by placing phantom bids).
As both Treasury Notes and Mortgage Backed Securities and their purchase are mostly incomprehensible by the public the latter would be easily indoctrinated into thinking that QE would not affect (but indeed it would) the market as badly as simply printing temporary extra fiat money.
That borrowed QE money will have to be repaid at some future time before people realize that there have been massive borrowing on top of the official figure of money in circulation.
“With interest rates expected to increase further and no meaningful improvement in supply coming, it seems that renting is going to become even tougher before the situation improves,” Cameron Kusher, PropTrack’s director of economic research, said.