Tuesday, January 5, 2010

Problems Facing World Economy in 2010

There are some grounds for optimism in the forthcoming year. Hopefully, the corner has been turned. But, nevertheless there are still many serious problems facing economies around the world.

Chinese Mercantilism

China has a policy of artificially keeping the Yuan undervalued. It does this through exchange controls and purchasing large sums of dollar assets. This weak Chinese Yuan is good for Chinese exporters, but, it creates disequilibrium in the world economy. It leads to a large trade surplus for China and a deficit for the US. The weak Yuan harms global demand, especially in the US. If the Yuan appreciated to its natural level, Chinese consumers could buy more imports and US companies would have greater competitiveness in selling to China.

Paul Krugman estimates the undervalued Yuan could cost the US 1.3 million jobs in 2010. (macro effects of Chinese mercantilism)

Also, this undervalued Yuan is a form of 'beggar thy neighbour' protectionism. It leads to retaliation in the form of protectionism against Chinese imports.

Weakness of Domestic Growth

Past growth was based on rising asset prices (especially housing) and a credit bubble. Neither of these is likely to return. Consumers are much more reluctant to spend, we are entering a new era of frugality with higher saving ratios. This has definite benefits but makes a recovery to normal growth more difficult.

False Dawns.

The global economy has suffered its worst years since the great depression of the 1930s. A small improvement in growth could cause a premature celebration of recovery - leading to the removal of expansionary fiscal and monetary policy which could cause a double dip recession.

Budget Deficits

The precipitous falls in economic outpur has compounded structural deficits leaving many countries facing record peace-time debt levels. Already some countries like Greece have already had rating downgrades. Others like the UK and Ireland have been threatened with rating downgrades. The need to offer concrete plans to reduce borrowing makes it a difficult balancing act for maintaining economic recovery.

Financial Weakness

Many banks and financial institutions are still nursing large losses from the credit crunch. It will take time for banks to improve their balance sheets. The prospect of further falls in house prices could still undermine banks fragile bank balance sheets.

Commodity Inflation

Whilst the fundamental problem is still spare capacity and unemployment, evidence suggest commodity prices are already rising due to strong Chinese and Indian demand. Rising oil prices could cause a return of cost push inflation we saw at the start of 2008. This could complicate Monetary policy which is trying to boost growth.


alex said...

How do we avoid world economy crisis? Look simple...just bang down the crude oil and gold price in the comodity market to release the value back into the world economic stream. Why? Because all the money(very2 big amount) are withdraw from share and bon market like leman brother's bon and use this money to buy gold and crude oil and the bon fell straight to the bottom. This block the world cash flow because they have change the money in the world market into solid goods which only have value when sold out(market no money). Like they sell US dollar to buy gold and crude oil in US, US currency drop and the gold and crude oil value up. This make the market shortage of cash flow value because the money value become small. The world is round, all property, comodity and share in the market have a total value. When gold & crude oil in the comodity market up, the other value drop but the total value remain the same. Why they choose gold & crude oil? Because this two item have demand and limited quantity in the world. To make this success, we need all the country and people in the world cooperate to sold out their gold and crude oil if they have to gain back the other part value.
Once the crude oil & gold value are high, the severe world ecnomy crisis is there and wait time to explode.

Anonymous said...

Its sad to see the blame always going on the developing nations like china. The speak of USA is as if it does all things very transparently.The chinese are playing economics as US does.Simple

There was a time when US always used the word - open up markets for injcreasing trade and making better world.... The suggestion made was to cut subsidies by the developing economies. When the same scenario came in the agricultural field...US never will cut agricultural subsidies..

So the point is...china can play smart and is US going to play smarter than it.

Hypocrisy is permitted sir....!!