Saturday, September 17, 2011

Why is the world facing an economic crisis?

Just trying to make sense of the current economic turmoil that the world faces today. 

1. The developed world has a problem of low growth. What makes things worse is that many of the developed economies are over-leveraged. 

2. Because of the de-leveraging there is going to be lower cash for reinvestment delaying the onset of growth. 

3. Given the fact that many countries (in the developed world) are trying to de-leverage at the same time compounds the problem. The world is counting on China and India to pick up the slack in demand but that may not be enough. 

4. While China is large much of its economy is dependent on exports to the developed world and exporting to China is not the simplest thing to do. And India is struggling with high and sticky inflation and policy makes are having a tough time trying to reduce inflation as well as maintain growth. 

5. While the world may have the capability to emerge from this crisis without a string of defaults, given that the alternative is on the table makes it even more difficult to do so. This is like a bank which may have capability to avoid bankruptcy but is likely to fail because even a perceived risk may cause a run on the bank. 

6. There is risk of sovereign default by a number of countries in Europe with many even predicting a default by United States. The fact that many large economies are in a similar position a default by one could trigger a contagion by triggering pulling out of money by investors or raising borrowing costs even more. While United States may not technically default as it can print its own dollars, monetization of debt would lead to severe devaluation of currency and cause havoc

7. And so the cycle continues.  

Governments worldwide are trying to breakout of this vicious cycle, through injections of Quantitative Easing but last couple of rounds have not helped and because of the already high debt there is only so much these countries can do. 

No comments:

Blog Widget by LinkWithin