Tuesday, 22 March 2011

Instabilities in the world economy

A central banker from the Group of Seven major capitalist economies, who declined to be named, told Reuters: “I think the world economy is going to go right down and it has happened at a time when financial markets are still fragile.”

Even before the events of that two-fold and terrible human tragedy in Japan, the global financial system was looking increasingly unstable.

On the other side of the pond that great lake that separates us from our friends in that so-called special relationship, the two-year rise in US equity markets has been based, not on any upturn in the American economy, but on a massive injection of funds by the Federal Reserve into the financial system. In a recent comment published in the Financial Times, business economist David Rosenberg noted that just as the stock market rise of 2003-2007 had been built on a “shaky foundation of unsustainable credit growth and house price appreciation, the current … rally has been built on the even shakier ground of surreal public sector intervention.”

The absence of any real recovery in the US economy was underlined by home construction figures released on Wednesday. They showed that last month, construction of single-family and multi-family homes was down 22.5 percent on the level in January, while building permits fell to their lowest level, in seasonally adjusted terms, since the government started recording them in 1960. At the same time, wholesale prices in the US rose by 1.6 percent last month, as a result of higher energy and food costs.

In the European Economic Community, it is clear that the banking and currency crisis, which broke loose a year ago, it has not been resolved as Spain and Portugal come under increasing pressure from the financial markets.

And in Asian continent, it had become apparent that the Japanese economy was about to experience another downturn, while fears were being voiced that the Chinese economic expansion was being produced by an unsustainable real estate and construction boom, fuelled by a massive expansion of credit; add-on, the rise in oil prices resulting from the turmoil in the Middle East which has sparked fears of a recession, or at least a significant reduction in economic growth.

In a major speech delivered last Friday, prepared before the Japanese events, Bank of England Governor Mervyn King remarked that the instabilities in the world economy that had led to the financial crisis in 2008 had not been overcome.

 “None of the underlying causes of the current crisis have been removed. The problem of ‘too important to fail’ banks is still with us. And even more intractable is the challenge of how to reconcile free trade with a stable international monetary and financial system. Today, the most obvious problem at the global level is that the imbalances are growing again.”

1 comment:

Chris H said...

Ssh! You might spark a financial crisis. And we know who pays for those.

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