By: Dr. Mike Campbell
The double dip recession is yet to materialise. The concept behind the “double dip” scenario is that the moves taken to alleviate the worst of the consequences of the global financial crisis and stimulate the economy did nothing to address the fundamental reasons why the economy tanked in the first place. Consequently, the “recovery” was styled as “all froth and bubbles” and proponents of the scenario proclaimed that the double dip recession was only a matter of time. In other words, these analysts claimed that the world’s economies would be plunged into a second (possibly deeper) recession than the last one; and much fun will be had by all.
The world has moved out of recession, but the pace of economic recovery around much of the world has been very slow. For a very long time, major nations have been “living beyond their means” and using government bonds as a vehicle to pay for various projects and service existing debts. However, all this comes at a price and that price is linked to perceived risk – when confidence fades the cost of servicing the debt rises.
The Federal Reserve have embarked on a policy known as “Twist” which is designed to purchase short term bonds and exchange them for longer term bonds in a move to keep interest rates on these vehicles down. However, the Federal Reserve noted that: "Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. There are significant downside risks to the economic outlook, including strains in global financial markets."
The move initially prompted a Dollar rally, but as the Federal Reserve comments were absorbed by markets, stocks around the world fell. If only central banks could inject a little confidence into the markets…