"The expansionist monetary policies, with near-zero interest rates set by central banks, and higher fiscal deficits, are more suited for a severe recession, such as in late 2008 than for the current situation of a return to growth. Prolonged expansionist monetary and fiscal policies are liable to cause inflation and encourage new bubbles in stock and real estate markets," said Bank Hapoalim chief economist Leo Leiderman at a conference at the Tel Aviv University's Faculty of Management.
Leiderman said that economic policy makers in Israel, and especially in the US, face a difficult challenge in 2010: how to begin amending their policies in a way that will reduce the deficit (by cutting government spending and raising taxes) and raising interest rates, while avoiding severe collateral damage to the real economy.
"The present circumstances, in which is clear that it is not possible to continue current policies for long, and that there will be a need for painful policy corrections already in 2010, creates considerable uncertainty, resulting in a possible double-dip recession or W-shaped recovery," said Leiderman. He believes that the present high level of uncertainty, particularly about the large increase in debt-to-GDP ratios in developed countries, causes the business sector to shorten its planning horizon, which is liable to affect investment in the real economy in the long term.
As for a recovery in capital markets, Leiderman believes that the conduct of many investors suggests a big change in the past three months. Whereas many investors once felt that "cash is king", and held 30-40% of their investment portfolios in cash and deposits, investors' appetites for risk has reemerged, and they have reduced the those liquid positions in their portfolio to 10% or even 5%.
"It's clear that part of this development is because the price of money - the interest rate - has deviated considerably from the level acceptable in normal times," he said.
Published by Globes [online], Israel business news - www.globes-online.com - on September 7, 2009
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