I’ve been speaking of late of how there are increasing risks to the out years – especially as a debt binge of 2009-2010 hits China (NYSE:FXI) combined with a cyclical downturn in the U.S. economy – which never was that strong to begin with and simply is running full of steroids. As for all the kicking of the cans seemingly going on in every corner of the developed world, one really knows when those slam flat into a wall. But other than central banks simply monetizing a new wall of debt, the U.S. going from 10% structural deficits to 20%, and China (NYSE:FXI) pulling off another 2009 debt binge – I am not sure what the policy response is going to be during the next global downturn, which should not be that far off.
We have reports that Dr. Doom, Nouriel Roubini is painting a quite dire picture in a similar time frame – 2013.
(Oh yes, Roubini also thinks there is a chance for QE3 by end of year – ding ding)
- In an interview with CNBC on Saturday, the head of Roubini Global Economics said the probability of QE3 will become “significantly higher” if U.S. economic weakness persists and the stock markets correct 10 percent or more.
- A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy,New York University professor Nouriel Roubini said.
- There’s a one-in-three chance the factors will combine to stint growth from 2013, Roubini, who predicted the global financial crisis, said in a June 11 interview in Singapore. Other possible outcomes are “anemic but okay” global growth or an “optimistic” scenario in which the expansion improves.
- “There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”
- World expansion may slow in the second half of 2011 as “the deleveraging process continues,” fiscal stimulus is withdrawn and confidence ebbs, Roubini also said.
- In Europe, officials need to restructure the debt of Greece, Ireland and Portugal, and waiting too long may result in a “more disorderly” process, Roubini also said. The risk in Japan is “if growth fizzles out after a short-term reconstruction stimulus,” leading to a renewed struggle to maintain expansion around 2013, Roubini said.
- China’s economy may face a “hard landing” after 2013 as government efforts to boost growth through investment cause excess capacity, Roubini told reporters. “China is now relying increasingly not just on net exports but on fixed investment” which has climbed to about 50 percent of gross domestic product, he said. “Down the line, you are going to have two problems: a massive non-performing loan problem in the banking system and a massive amount of overcapacity is going to lead to a hard landing.”(bingo)
- A record $2.7 trillion of loans were extended in China over two years, pushing property prices to all-time highs even as authorities set price ceilings, demanded higher deposits and limited second-home purchases. The nation’s current challenge is to maintain growth and curb price gains ahead of a leadership change next year, Roubini said. Officials may use administrative steps and price controls, as well as raising rates further and allowing currency appreciation, if inflation becomes a bigger problem, he said.
- After next year, the bigger challenge in China is “to reduce fixed investment and savings and increase consumption. Otherwise after 2013, there will be a hard landing,” he said.
- Roubini in July 2006 predicted a “catastrophic” global financial meltdown that central bankers would be unable to prevent.
This is a guest post written by Trader Mark who runs the blog Fund My Mutual Fund.
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