They poured billions of dollars into troubled banks, unveiled massive spending packages, and even turned on the presses to print more money. The economic crisis prompted unprecedented rescue measures by financial authorities around the world.
Now, they’re turning their attention to how they might unwind these emergency programs.
“Today is a good moment to start discussing the exit strategy," Joaquin Almunia, the European Union's monetary affairs commissioner, told OECD television ahead of an annual meeting this week.
"How we will organize a gradual withdrawal of the fiscal stimulus and the monetary stimulus, provided that the private demand will contribute more than today to GDP growth?" he continued. "We cannot afford to get out of this recession [by] creating big imbalances that would be at the origin of the next crisis.”
Put simply: All that money poured in to shore up ailing economies has to come back out.Ways To Exit
Earlier this month, finance ministers from the major G8 economies said they had begun to look at ways to exit from massive spending sprees.
Top officials from the European Central Bank have also called for clear plans to withdraw fiscal and monetary stimulus.
And the International Monetary Fund (IMF) has urged U.S. monetary authorities to consider how they would unwind emergency measures taken to push down interest rates and fight the downturn.
Those measures include slashing interest rates to a record low and a program to effectively print hundreds of billions of dollars by buying government debt, a step known as quantitative easing.
It’s quite amazing how we switch from worrying about the end of the economy to now worrying about resurgent inflation.
In one way, there’s a “feel-good” factor to all this talk of exit strategies. After all, it reflects a growing optimism that the worst of the recession might now be over.
But it’s that very optimism that’s led to fresh worries that the emergency medicine could set off a new ill: inflation.
Neil Mackinnon, an economist with ECU Group, a London-based financial firm, says recent developments on financial markets suggest inflationary expectations are, indeed, on the rise.
“We’ve got an interesting situation where longer-term interest rates -- bond yields, if you like -- have been rising. We have a situation where the futures market has already starting to predict an increase in the U.S. Fed funds rate, the main targeted interest rate that the Federal Reserve focuses on," Mackinnon says. "Markets are predicting that there will be an interest rate increase by the end of this year. So it’s really in response to this notion that somehow the worst is over.”'There's Real Danger'
But there’s the rub. So far, it’s just that – a notion. Hard evidence of a global economic recovery is still thin on the ground, posing a dilemma to policymakers. Doing nothing could drive up inflation and borrowing costs, but acting too soon to unwind all that stimulus could choke any recovery.
“There’s real danger," Mackinnon says. "And we have an example in Japan in the 1990s, where the Japanese government made a fatal error in regard to fiscal policy where they increased consumer taxes. And what that did do was immediately capsize any economic recovery and put them straight back into recession."
Surprised by the sudden shift from impending economic doom to too much optimism? Well, you’re not alone.
“It’s quite amazing how we switch from worrying about the end of the economy to now worrying about resurgent inflation,” says Vanessa Rossi, a senior research fellow in international economics at London’s Chatham House think tank. "It’s quite difficult to understand how [we] could be talking about the exit strategies already when we’re not even sure if we’ve seen the end of the recession and certainly we don’t see strong green shoots yet.”
No one is yet saying it is time to actually start to scale back rescue efforts. The discussion centers mainly on when to move out of crisis mode and begin designing those exit strategies.
Officials from the major economies say they want to see recovery take hold before they start bringing budget deficits down and soaking up the money spent tackling the downturn.
As International Monetary Fund chief Dominique Strauss-Kahn said earlier this month, “Before the exit strategy, we have to exit the crisis.”