The bears are out again, painting images of doomsday and Armageddon for the global economy.
In a presentation early in April, Joseph Stiglitz, an award-winning economist, says the trend of running deficits in countries such as the United is unsustainable.
"U.S. has become, to a large extent, "deficit of last resort"," said Stilgitz in a presentation. "As other countries take actions to reduce trade deficit, if surplus countries maintain policies to sustain surplus, then the US deficit essentially equals the sum of the surpluses. But this situation is not sustainable."
In essence, the global trade system is going to collapse as deficit-running countries aim to reverse the trend at the expense of surplus-running states such as Germany, Saudi Arabia, and Japan.
The solution, to Mr. Stiligitz's mind, is if the system moved from the dollar as a reserve currency and focus on a global reserve system, apart from a global regulatory system and greater co-ordination of global monetary policy.
EURO CRISIS: GREATER THAN WE THOUGHT
George Soros, the billionaire hedge fund investor, who has profited from making contrarian bets, says the euro crisis is far worse than we had earlier estimated. In fact, the euro crisis could destroy the European Union.
"This is a rare occasion when the interaction exerts such a large influence that it casts its shadow on the global economy," said Mr. Soros in a speech in Berlin late last week. "How could this happen? My explanation is that there is a bubble involved but it is not a financial but a political one. It relates to the political evolution of the European Union and it has lead me to the conclusion that the euro crisis threatens to destroy the European Union."
Mr. Soros argues that The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities.
"Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union."
Whether or not the euro endures, Europe is facing a long period of economic stagnation or worse. Other countries have gone through similar experiences. Latin American countries suffered a lost decade after 1982, and Japan has been stagnating for a quarter-century; both have survived.
"But the European Union is not a country, and it is unlikely to survive. The deflationary debt trap is threatening to destroy a still-incomplete political union," notes Mr. Soros grimly.
'DOCTOR DOOM' SAYS...
Nouriel Roubini, renowned economist who is also know as Doctor Doom for his bearish view of the world, seems to share Mr. Soros' view regarding the eurozone.
The trouble is that the eurozone has an austerity strategy but no growth strategy, says Mr. Roubini. "And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming."
Without a much easier monetary policy and a less front-loaded mode of fiscal austerity, the euro will not weaken, external competitiveness will not be restored, and the recession will deepen, says Mr. Roubini.
"And, without resumption of growth - not years down the line, but in 2012 - the stock and flow imbalances will become even more unsustainable. More eurozone countries will be forced to restructure their debts, and eventually some will decide to exit the monetary union."
PIMCO'S VIEW
Mohamed El-Erian, CEO of PIMCO, which runs the world's largest bond fund, agrees that the eurozone remains in a dire crisis, but may not go as far as to share Mr. Soros' doomsday view.
There are murmurs again of European central Bank and U.S. Federal Reserve initiating another round of quantitative easing, but nothing is certain.
"Some officials seem committed to renewed unusual central bank activism," said Mr. El-Erian in a column. Others feel that this would only postpone the inevitable adjustments required on the part of governments, companies and individuals. And there seems to be no way, as yet, to get both groups on the same wavelength quickly.
"Some officials seem committed to renewed unusual central bank activism," said Mr. El-Erian. "Others feel that this would only postpone the inevitable adjustments required on the part of governments, companies and individuals. And there seems to be no way, as yet, to get both groups on the same wavelength quickly."
The slowdown in China does not bode well for the global economy's outlook either, further bringing dark clouds of continued economic downturn.
That's a pity given that global stock markets had staged a smart rally in the first quarter. There is a real danger that much of the gains could well be wiped up before the year is over.
© alifarabia.com 2012
