The Economic Outlook: 2012 and beyond

The Economic Outlook: 2012 and beyond
A great analysis by Abbas Bakhtiar

Excerpts:

The current economic situation

Let me tell you in no uncertain terms that we are facing a synchronised global economic depression and I am not the only one that is saying this. In early February, the International Monetary Fund’s chief Dominique Strauss-Kahn said the world's advanced economies -- the U.S., Western Europe and Japan -- are "already in depression”. Gordon Brown, the UK’s Prime Minister also used the word "depression" to describe the global economy, although his aides quickly said it was a slip of the tongue.


The missing engine of growth
In contrast to the China, the United States has relied on consumers and the government for its growth. According to Peter G. Gosselin citing Roach of Morgan Stanley Asia, U.S. consumers constitute only about 4.5% of the global population, yet they bought more than $10 trillion worth of goods and services last year. In contrast the Chinese and Indian consumers combined which account for 40% of the global population bought only $3 trillion worth.
If we just look at the differences in consumption levels between US and China-India, we’ll see that these countries are not in a position or have the financial resources to pick-up the slack left by the US consumers

So who is going to take the position left vacant by the US and act as the world’s economic locomotive and pull the world out of the depression? The answer is no-one and everyone. US is clearly not able to do that much. As a matter of fact the US consumers have to get used to lower spending levels for at least a decade, if not for good.


The coming inflation
So far, all governments are reducing their interest rates to historic lows and at the same time spending a lot of money that they don’t have. It will take at least two more years for the economy to stabilise. Here we should note that by stabilise I mean an arrest in decline rather than outright growth. Once that point is reached we will begin to see the effects of the loose monetary policy: a tremendous rise in inflation which can be accompanied by low economic growth or in other words stagflation.

The fear of stagflation arises from the fact that from all indication, growth will not strengthen anytime soon. It is quite clear now that the US and to a large extent the European consumers have been hit hard by the current crisis. There is also the possibility that another banking crisis may still ensue such as the commercial real-estate mortgage defaults and above all the repetition of currency crisis (1997 Asian Financial Crisis). Already we see that China Japan, Korea and others are setting-up $120 billion currency defence fund to protect Asian currencies against speculative attacks.

The current economic crises have left many countries’ local banks with foreign currency loans that they find difficult to repay in that currency. This and the possibility of defaults have made these countries a good target for speculators. If such an attack starts, many countries will automatically have to devalue their currencies (even more than they already have) or try to defend their currencies. In either case this may trigger yet another crisis that may actually destroy a good portion of many economies around the world.

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Source:American Chronicle