In the wake of the 2008 global financial crisis, the United States decided to pursue a bold strategy in order to bolster the economy. The Federal Reserve dropped interest rates to near zero levels and instituted massive bond buying programs to promote domestic borrowing and spending. These maneuvers were a huge risk and led the United States into uncharted waters.

 

Seven years after the implementation of this strategy, the United States economy is performing very well relative to the rest of the world. However, emerging markets and the countries which make up the Eurozone have not been able to recover at the same rate.  

 

 

The Japanese and the European Central Bank have also attempted to implement large scale bond buying programs, but they have not found the same success as the United States. The failure of this strategy outside of the United States can partially be attributed to the the size and global presence of the American economy. The dollar is the base currency of international trade, accounting for approximately 70 percent of all transactions; when the Federal Reserve takes action, it has a ripple effect throughout the rest of the world. Other central banks do not carry the same weight and cannot impose their will on the same scale.

 

Quantitative easing has also created a risky environment for savings and investment. The incredibly low interest rates promote more active investment profiles and create an incentive to take on more risk. The risk taking that is required to make profits in a low interest rate environment can become very dangerous as rates rise. A failure to adjust investment strategies could be disastrous.

 

Ultimately, central banks around the world must develop new strategies to lift themselves out of the current rut. However, simply following the same path taken by the United States will not guarantee success. New and innovative monetary policies may need to be used in order to bring back growth.

 

Should Europe try to slow down its QE policy at the same rate as the United States? When the Federal Reserve raises interest rates will economic growth continue? Feel free to leave a comment or find me on Twitter @Andrew_Morse4