It is often said that when America sneezes, the world catches a cold. This saying tends to refer to other countries following its example, but when it comes to changes in US monetary policy, it can be understood in a different sense, since ripple effects can affect significantly the economic well-being of other countries, particularly emerging economies, by disrupting their stock markets, asset valuations and capital flows.
While the US Federal Reserve has recently hinted that it will raise interest rates “more aggressive” – possibly as many as five times this year – to blunt the country’s soaring inflation, there are growing concerns that its policy shift could have major impacts on the financial stability of many developing countries. development, and thus further slow their pace of recovery from the COVID-19 pandemic.
To address these concerns, G20 finance leaders have called for a “well calibrated, well planned, well communicated” normalization of monetary policy to minimize the impacts of the Fed’s interest rate hike. The consensus was reached last week at the meeting of G20 finance ministers and central bank governors in Jakarta, Indonesia.
Yet great difficulties lie ahead as finance ministers seek to achieve their policy goals, given the vulnerable financial situation the world currently finds itself in. To help prop up the struggling U.S. economy during the pandemic, the Fed resorted to printing trillions of dollars and pumping them into the banking system, driving the U.S. national debt to an all-time high of over 30 trillion dollars. The amount of money created from “thin air” reached such unprecedented scale that by December 2021, 80% of all US dollars in existence had been printed in the past 22 months, according to reports.
Whether the United States “financial fantasy” can be sustained remains a question for economists to answer. But the increase in the money supply, given the global dependence on the dollar, has already led to higher food and energy prices worldwide, making life even more difficult for the poor. . Today, with rising US interest rates in sight, developing countries, especially those with weak economic fundamentals, face the risks of much higher debt burdens and exits from capital which, if not handled properly, could lead to financial crises.
This makes it all the more urgent and necessary for countries to strengthen cooperation in coordinating their macroeconomic policies to propel common development. The developed countries represented by the G7, together with the EU, still enjoy a dominant position in the global financial system. It is therefore imperative that they act responsibly to minimize the negative impact of their monetary policies on the developing world.
* Guest editorial by China Daily.