I don’t need to summarize what’s going on in the world of economics as everybody knows the criticism being leveled at QE2, the attacks on Obama for being anti-business, continued European failures, concerns about China, and the ongoing currency war. There are quite a few optimists who believe that QE2 is what the economy needs to boost GDP growth and bring Americans back on track into the workforce, while there are a number of pessimists who strongly believe that the world is doomed. Charles Hugh Smith, a writer covering economics and global finance, explains why he is bearish on a global recovery. I came across Smith’s article “Is the Global Economy Rolling Over?” on Daily Finance and wanted to share a few points. He predicts that the “global economy is rolling over into stagnation or even recession. The evidence is piling up from all corners of the globe.” Here is a summary of his analysis and a good synopsis of the broader problems the world is facing:
- GDP of the eurozone dropped 0.4% in Q3, down from Q2 growth of 1%. Germany, one of the countries in the center of the currency war, grew only 0.7% vs a rise of 2.3% in Q2.
- While Spain and Italy were flat, Greece contracted by 1.1% in Q3.
- Greece deficit is now 15.4% of GDP and public debt is 126.8%.
- Ireland is evolving into a sovereign debt crisis that is feared to continue to spread throughout Europe, witnessed by rising spreads.
- In general, there is fear that the debt crises in Europe could pull the European Union apart.
- Japan’s deflation woes continue as exports slowed on weak demand in Asia for Japanese goods and a stronger yen.
- The central government in China is beginning to tighten lending and raise rates on rising food prices, and bubbles in commodities and housing. Chinese authorities are restricting foreign ownership in real estate and announced price controls on food prices which leaped 10% in a year.
- Commodity and stock markets may have already priced in rapid growth in China, which could have a tremendously negative impact given a projection of decelerating growth.
- The Fed is facing heavy criticism for deliberating devaluing the dollar, triggering a currency war which could result in bloody battles.
- Homeowners in the United States are still underwater on their mortgages and housing prices are declining from oversupply.
- Lack of job creation.
Strictly looking at the US, Smith did not mention the detrimental effect of the widening gap between the rich and the poor, leading to the elimination of a middle class. In addition, policy makers are divided on whether or not Obama should let the tax cuts expire. Global growth depends on all entities to be in sync, but with the chaos erupting all over the world, it may take years before the economy stabilizes. Perhaps 2007 was just a perfect world, and we are now living in a new normal.