The Known Unknowns Stalking the Global Economy into 2023

No one knows how 2023 will play out for the U.S. and world economies or for global financial markets. But to rephrase former Defense Secretary Donald Rumsfeld, today there are an unusually large number of disturbing known world-economic unknowns. What we know about the troubling economic questions in Europe, China, and the emerging economies should give us significant concern about a world economic and financial market meltdown this year. That’s without even mentioning the unknown world-economic unknowns.

One of the more important known economic unknowns is how will the world economy respond to the main central banks’ abrupt shift from an unusually loose monetary policy to one of aggressive monetary-policy tightening to regain control over inflation.

This question becomes all the more pertinent at a time when the Federal Reserve is raising interest rates at the fastest pace in the past forty years. It also becomes pertinent at a time when both the Fed and the European Central Bank have shifted from a policy of flooding the markets with liquidity through their bond-buying activities to one where they are now draining market liquidity through choosing not to roll over their maturing bond holdings.

Judging by the way that existing home sales have fallen for the 10th month in a row under the weight of high mortgage rates, there is now a real risk that the world’s central banks will challenge financial markets with the undesirable combination of high interest rates and a recession.

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