Macroscope | Why US and European central banks could be source of next global financial crisis

Who would have thought the world could receive so many blows as the global economy struggles to recover from the Covid-19 catastrophe? But having suffered a succession of further shocks from the global supply chain shortage, the Ukraine war, the inflation crisis and tighter monetary conditions, it’s no wonder pessimists think we could be heading into another slump.

The global economy is running ragged right now. The last thing it needs is another potent shock, just at the point when the recovery is at its most vulnerable and global policymakers’ defences are low. But “black swan” events come out of the blue and strike when least expected, like the global financial crisis in 2008.

The world still bears too many scars from the 2008 financial crisis, which left the global economy weakened and financial stability at risk. Years of monetary and fiscal super-stimulus have left a legacy of problems which global governments and central banks are struggling to resolve from a weak position.

The impact of so much policy accommodation since the 2008 crash and during the Covid-19 crisis has brought with it a whole host of potential dangers. Not the least of these are ultra-low global interest rates and bond yields which fail to reflect the growing credit risk from governments issuing so much debt and central banks printing so much cheap money.

The challenge facing central banks is normalising interest rates while simultaneously trying to shrink their bloated balance sheets, offloading surplus stockpiles of government debt accumulated under quantitative easing programmes.