Policymakers’ hands are tied. That’s good

This time, it’s different — because policymakers can’t do much.
There are talks of global coordinated action to bring order to the financial markets, which are moving all over the place as a million worries rise.

However, even if the G-20 or G-7 countries meet and try concerted action, it will not match the scale of the action taken in 2008 following the credit crisis.

And that’s the best thing that can happen to economies and markets, which have always done better in the long run when left to themselves.

And the US economy, too, will have to fend for itself.

The situation is similar to the rest of the world. Eurozone is in a sovereign debt mess with countries from Greece to Italy seeing the negative effects of high debt on its cost of borrowing.

Borrowing costs for indebted countries in the eurozone has gone up by 300 basis points (bps) to 2000 bps depending on the finances of each country.

The European Central Bank is caught between rising inflation (it is above ECB’s target of 2%) and worsening sovereign debt. European governments and the ECB can’t do much to improve sentiment or bring about economic growth.

So the eurozone economies will have to fend for themselves, too.
But India has it problems. Inflation is the effect of the government and the Reserve Bank of India pump-priming after the 2008 crisis.

The government ran up its fiscal deficit to 6.8% of GDP from 4%, while the RBI cut policy rates by 500 bps and bought government bonds to add liquidity to the system.

Inflation rose to double-digit levels on the back of the pump priming.

GDP growth forecast for 2011-12 is at 8% levels, down from growth levels of 8.6%.

But growth is expected to come down below 7.5%, according to some economists.