The Economist: Bubble warning Jan'10

After recent threads on Brendan O’Connor and Marc Coleman, it’s time for a bit of informed reading. These two articles from The Economist highlight some of the key problems facing the global economy. They’re worth reading.

So it’s round two of the crisis then?

I don’t know. The article suggests that this is the year these imbalances will come to a head. I think they identify a problem which at some future point will come to a head. It was clear that a number of countries had property bubbles, but they continued to increase for years.

Over the last decade, the global economy has averted recession (dotcom bust) and depression (property bust) with ever higher doses of medicine. It could be argued that if we had taken the pain of the dotcom recession, the global property depression may have been avoided. The current medications to avoid depression are governments massively going into debt and central bank programmes.

Too many economies are dependent on private sector credit expansion. It’s hard to see how this is sustainable in the long run. Where private debt has been transferred to public, it seems to be done to enable the private sector to load up with more.

If the current crisis continues or evolves, there aren’t many new medicines left to try, the private sector is too indebted, public sector debt is getting there (some countries worse than others) and interest rates are at historic lows.

Maybe I’m too bearish, but the bulls seem to depend on private sector credit expansion. IMO this will hit the buffers at some point and the longer it goes on, the greater the correction required. The bulls have governments and (probably) central banks on their side.

I still do not understand how there will be enough income available for growth when so much will be going to pay off the last 10 years debt. Either it is inflated away or someone has to pay it.

I imagine debt per se only effects total growth when it can’t be paid back (in a closed system as someones repayments and interest are income and capital repayments to the loan originator). So I imagine you are talking about growth in Ireland? or US/UK? both of which are indebted to external entities. In which case I agree - again given that the money wasn’t invested wisely (which obviously is a given).

Apologies London_irish, I missed it.

It’s not easy to inflate debt away without massive defaults. It’s easier to inflate debt away if the debt was originated during a period of high inflation. I.E. the initial payments could be met at higher interest rates. As a rough indicator of going from low to high inflation, you should probably recalculate what the initial payment would have been at the higher inflation rate to scare the pants off you. Obviously where interest is fixed, inflation would help.

I heard this piece in the Economist mentioned on “Down to Business” on Newstalk last Saturday. They were discussing the outlook for the year ahead with some bloke from one of the brokerage houses. Since everything he has previously said was rosy and positive he basically laughed at this article and said it wouldn’t be the beginning of the year without a gloomy article from the Economist.
I didn’t like his 'tude but can’t remember who he was.I don’t care either.I know who I am more likely to believe.

I’m wondering about another option: some kind of global declaration of force majeure that just scrubs out the last 10 years. I have no idea how that might work, but it seems to me everybody needs it and a falling tide lowers all boats by relatively the same.

Moodys take on European Sovereign situation

A key factor that has prevented complete economic and financial meltdown
has been the collapse in interest rates. As a result, debt affordability
has not deteriorated nearly as much as it would otherwise have done.
However, if markets were to switch their concerns about weak economic
activity to fears of inflation and market rates were to rise
significantly, thereby revealing the true cost of the crisis in terms of
making debt less affordable, Moody’s cautions that more highly indebted
countries could find their ratings tested. … eign_risk/