Analysts are warning investors that if central banks of emerging economies all try to ease deflation at the same time it will have devastating effects on the global economy.
Countries like Turkey, Brazil, South Africa and India all raised interest rates last week and whilst this practice is proven to work on a micro level, the individual tightening of credit regulations across several emerging markets at the same time is economic suicide.
The potential problem in these emerging markets is that they were too complacent and liberal in dishing out loans. As a consequence the credit bubble for each country as inflated to dangerous quantities, and the crash of one market could have a domino effect on the economy of other emerging markets.
Introducing hardball credit sanctions all at the same time has already proven to fail. After the banking crisis of 2008, a bundle of Eurozone countries brought in deflation policies at the same time and plagued the recovery of the Euro for over four years because it created poor feedback loops indicating the economy was stronger than it actually was.
If the credit bubble should pop in an emerging market it is unlikely that the two economic superpowers – USA and China – will have the strength to rescue the global economy. However, if leading central banks combined forces to shape global monetary policies they could deflect a financial crisis and create foundations on which they could build financial stability.
Although the Eurozone did eventually survive it was not without its casualties along the way – most notably Cyprus who picked the pockets of wealthy residents to cover the cost of a bailout. This move is surely setting a precedent for banks all over the world to take your money in the event of an economic meltdown.
Invest in precious metals
Traders do not know which way to turn at the minute. Towards the backend of 2013, it appeared that the global economy was getting stronger and faith returned to the equities market. Then when it emerged economic data from the US was not as strong as first thought stock market traders panicked and turned their attention back to gold.
The gold revival was short-lived, and now around a dozen countries are pulling back on inflation confidence will return to the market. However, unless the banks can resolve the debt crisis inflation will go through the roof under the entire banking system collapses.
The global economy is being propped up by magic money at the moment. Central banks have been plying their economies with electronic money in the form of Quantitative Easing. When the US Federal Reserve announced its intention to taper its assets spending gold and silver prices took a tumble. China is also winding down its stimulus program so traders will invest in equities rather than commodities.
Until the central banks pull together and focus on the global market, policy makers are just racking up billions in debt every day. Eventually the debt ceiling will come crashing down – during which time gold prices will soar. To invest in the security of your financial future check out the latest gold prices at coininvest.com today.