Saturday, August 15, 2009

"Ten Unsolved Problems in the Global Economy"

Naked Capitalism ( I suggest subscribing) forwarded the blog entry below from "The Aleph Blog" on problems that still remain in the global economy. I agree with all of them and have added a few of my own..

"There are many celebrating the recovery as if it were already here. This is a brief post to outline my main remaining concerns for recovery of the global economy.

1) China is overstimulating its economy, and forcing its banks to make bad loans. This pushes up commodity prices, and makes it look like China is growing, but little of the investments made are truly needed by the rest of the global economy.
2) Western European banks have lent too much to Eastern European nations in Euros. The Eastern Europeans can’t afford it, and widespread defaults are a possibility.
3) The average maturity of bonds held by foreign investors in US Treasuries is falling. Runs on currencies happen when countries can no longer roll over their debts easily, which is facilitated by having a lot of debt to refinance at once.
4) On a mark-to-market basis, market values for commercial real estate have fallen dramatically. Neither REIT stocks nor carrying values for loans on the books of banks reflect this yet. Many banks are insolvent at market-clearing prices for commercial real estate.
5) We still have yet to feel the effects from pay-option ARMs resetting and recasting. Most of the pain in residential housing is done, but on the high end, there is still more pain to come, and the pay-option ARMs will reinforce that.
6) The rally in corporate debt and loans was too early and fast. Conditions are not back to normal for creditworthiness. There should be a pullback in corporate credit.
7) We had global overbuilding is cyclical sectors 2002-2007. We overshot the demand for large boats as an example. We overdeveloped energy supplies (that will be short-lived), metals, and other commodities. It will take a while to grow into the extra capacity.
8 ) The US consumer is still over-levered. It will be a while before he can resume his profligate ways, assuming a new frugality does not overcome the US. (Not likely by historical standards.)
9) The Federal Reserve will have a hard time removing their nonstandard policy accommodation.
10) We still have the pensions/retiree healthcare crisis in front of us globally."

My additions...............

1) Number 10 again.... Huge entitlement problem in the future in the US. Huge.

2) Unsustainable budget deficits ( local, state and national) - Yes fiscal stimulus was needed to prevent the economy from entering a black whole but money spent is money that has to be paid back. Further tax revenues are down dramatically. The US has to raise taxes big time but to do that when the economy is in the tank is ill-advised. We are stuck with deficits for some time to come. The risk of course is that the US demands too much of the world's capital to fund itself and the day might well come when others say enough is enough. ( currency and debt crisis - think emerging markets)

3) PIMCO has calling the period we have entered in to the "new normal." The wording highlights that we cannot expect a business as usual economic recovery. We will have to feel the pain and consequences of deleveraging and it will not be pretty. The consumption party is over. As above the US consumer will not recover back to pre-crisis levels. Not in the short term or likely the long term. Our economy will have to adjust. Unemployment will remain high for some time which is the major problem not mentioned above.

I will stop there as this blog entry is growing very long indeed...............

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