Is The Global Economy Heading For Another 'Lost Decade?'

Includes: FXE
by: Investment U

By Ryan Fitzwater

According to the International Monetary Fund Managing Director Christine Lagarde, unless nations work together to encourage growth, we risk another “lost decade” for the global economy.

Japan saw what some would call a lost decade in the ’90s. After a real-estate bubble burst, Japan saw its economy jump in and out of recession for over a decade. The economy crept along at an average growth rate of around one percent for years after the real-estate collapse.

This situation sounds eerily similar to the situation in the United States today, and there are even more issues over the pond…

A Scary Movie That Never Ends

In Europe, Italy has become the next country in line to be overwhelmed by a sovereign debt crisis. This brought European leaders together to create another rescue package. Developed by the European Financial Stability Facility (EFSF), the next rescue package should be able to start building funds in December.

While more rescue packages are encouraging to some, like Lagarde, to others they’re just another band-aid on the problem.

The good news is that China – a country that isn’t overwhelmed by debt – has become a potential source for funds to hopefully save Italy – the third-largest economy in the European Union.

But bailouts in Europe aside, China could take steps to let its currency rise and help boost consumption to promote economic growth.

Lagarde stated that, as a whole, Asia would have to be ready to respond should conditions become worse. Lagarde recommended that Asian countries take their feet off the fiscal brakes, reactivate central-bank swap lines and lean on reserves should the Global Economy begin to stumble.

And while emerging markets have stronger growth overall, there were obvious signals of slowing as advanced economies began to weigh on them. According to Donald Tsang, Hong Kong’s Chief Executive, the world economy faces a 50 percent chance of a recession.

What History Can’t Teach Us

We know that advanced economies need to restore confidence and lift growth, but for the first time in modern history, we’re seeing a new story…

Everyone is swimming in debt and needs to save themselves from drowning, but who’s on deck to throw the life preserver?

In the past, it was the developed world to the rescue. But then, the entire developed world didn’t have this level of debt.

The developed world, through organizations like the IMF, was the one to help those in trouble. Now that countries like the United States, the largest contributor to the IMF, are extremely underwater, the solution isn’t so easy.

So what do we do? We change the discussion.

The international community needs to get away from more bailout talks and focus on:

  • Ways to restructure the euro.
  • Keeping emerging markets on their current pace.
  • Promoting growth in advanced economies.

If not, we’re destined for 10 more years of volatile markets, high unemployment rates and snail-pace growth.

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