European banks is confirmed, the financial market will be able to move forward.
The financial market has high expectations for China, with talks every month about China’s inflation reaching its peak, and the country loosening its policy again. Although not impossible, the chances of this happening are slim. China’s inflation is very unstable right now, and experiences speak louder than statistics. In today’s China, the price of goods and services often rises by 10-30%. This illustrates the severity of China’s inflation problem.
China’s economy is approaching a slowdown, which is good news. Its current growth relies too heavily on its housing bubble, and the longer this growth lasts, the more painful the adjustment process will be.
Furthermore, China’s growth bottlenecks are becoming increasingly hard to overcome. For instance, if China decides not to curb inflation and to stimulate growth again instead, then it could face a severe energy shortage. The Fed or Europe might try to support the financial market again, but China won’t.
ROAD TO THE NEXT CRISIS
The world is approaching another economic crisis, this
time centered on government debt. After the 2008 crisis, none of the major economies fully restructured in order to prevent another bubble from forming. Instead, they used stimulus packages to create growth, hoping to grow out of their problems.
The key problem in the developed countries is the high cost of social welfare. Unless they can cut costs greatly in this area, their fiscal deficits will remain high. After WWII, developed countries set up welfare state policies to obtain social peace. As the population ages, the cost of this policy becomes unbearable. At the same time, they have lost their initial competitive advantage over developing countries, making them unable to grow out of their problems. Their short-term solution is to run fiscal deficits to keep the system afloat. This means many other countries will wind up like Greece. The US is particularly in danger. Although it can print money to pay off its debts, the prospect of inflation will eventually drive Treasury investors away. The resultant high bond yield will force the Fed to tighten to avoid hyperinflation.
Developing countries should stop property bubbles from forming, as they make the ruling class richer, while leaving the workers and entrepreneurs without a penny. Developing
countries like China and Vietnam are very competitive with costs, with low wages and the source of their wealth. However, they use the property bubble to redistribute wealth, which undervalues workers and businesses and encourages speculation. As fewer and fewer businesses and workers are willing to produce, inflation becomes rampant. Unless the basic governing philosophy changes the inflation crisis in emerging economies will worsen.
The world is unstable because decision-makers refuse to resolve structural problems, and short-term solutions only offer temporary relief. Once these solutions run out, the world will face another major crisis.
by Andy Xie
Independent economist
“The continuous chain of bubbles in the last 20 years was due to the fact that policymakers repeatedly used low interest rates to save speculators.”
“It seems thewhole world is on a downward spiral, and economic data this summer will likely be very poor and shocking, letting fear take over the financial market again.”
Bubble Trouble
