SYLLABUS SECTION: GS III (ECONOMY)
WHY IN THE NEWS THE TROUBLED GLOBAL ECONOMY?
There are three key terms which are being heard repeatedly in the troubled global economy coming days and weeks yield inversion, soft landing, and reverse currency war.
- Bond yield curve inversion
- Bonds are an instrument through which governments (and also corporations) raise money from people.
- Under normal circumstances, any economy would have an upward sloping yield curve
- When investors feel buoyant about the economy, they pull money out from long term bonds and put it in short-term riskier assets such as stock markets.
- In the bond market, the prices of long-term bonds fall, and their yield (effective interest rate) rises.
- When investors suspect that the economy is heading for trouble, they pull out money from short-term risky assets (such as stock markets) and put them in long-term bonds. This causes the prices of the long-term bonds to rise and their yields to fall.
- Over the years, inversion of the bond yield curve has become a strong predictor of recessions.
- The process of monetary tightening that the Fed is currently unveiling involves not just reducing the money supply but also increasing the cost of money (that is, the interest rate)
- When the Fed or any central bank would like to bring about monetary tightening in such a manner that slows down the economy but doesn’t lead to a recession.
- When a central bank is successful in slowing down the economy without bringing about a recession, itis called a soft landing that is, no one gets hurt.
- Reverse currency war
- The aggressive raising of interest rates by the Fed is causing more and more investors to rush to put money in the US.
- The dollar has become stronger than all other currencies because the dollar is more in demand than those currencies.
Read more: UPSC CURRENT AFFAIRS
SOURCE: INDIAN EXPRESS