Central Banks Scrambling to Prepare for an Economic Slowdown

Because debt has been almost universally cheap recently, both companies and countries have felt the need to load up on debt while they still can. Unfortunately, a recent report by the International Monetary Fund shows that lower potential output growths are causing a global slowdown and that accumulated debt will be difficult to pay off. This has been attributed to the after-effects of the global financial crisis, which economists now believe has permanently handicapped economic growth. Prior to 2008, output potential grew at 2.25%, but that figure has fallen to a projection of 1.6% from 2016 to 2020. We are already seeing the effects of a growth slowdown in China, where the central bank has been very active tightening policies since January. Similarly, debt in the Eurozone has become an issue again. Greece has just made a ridiculous demand from Germany in an attempt to lift their debt before an economic slowdown makes it impossible to ever amortize. Tension is further increased by the investigation into the bad assets that comprise a large portion of Greece, Portugal, Spain and Italy's core capital. Meanwhile, the Fed seems completely up in the air about how to prepare for the future. Previously, dot plots showed that we should expect interest rate hikes to begin by the end of the year, but the recent Fed minutes now show that we could see anything from this June to March 2016. If the IMF's projections are accurate, central banks will need to figure out their policy plans very soon.

-- Sashank Parigi