The developed world is heading into recession and every major policymaking body is making the wrong moves.
Here’s what various agencies could do to prevent this “nightmare scenario,” according to Citi:
- The ECB could step up its purchases of Italian and Spanish debt, even drawing a line in the sand — “We will not let yields rise above 5.5%”
- The Fed could to ignore that “frankly frightening letter from the Republicans” and take action to prop up asset price expectations
- Politicians could “adopt a plan to restructure Greece, Ireland and Portugal but to effectively ring-fence Italy and Spain through a gigantically expanded EFSF-style liquidity cusion”
- The U.S. supercommittee could “exceed its mandate, coming up with a long-term proposal for a return to budget surplus coupled with near-term stimulus”
None of these outcomes are likely, however, until markets get lower.
We’re stuck in what Citi calls the “malign cycle,” where markets are driving down the economic outlook and policymakers are always one step behind.
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