The events of 2008 have proved worse than the predictions of most economists. The near paralysis in the banking system has paralysed consumer and financial confidence leading to a sharp slowdown in growth and rising unemployment.
The prospects of a meltdown in economic fortunes for 2009 depend upon.
- How many more bad debts are there to write off? With house prices falling and rising unemployment pushing more into mortgage default, banks are still having to write off bad debts. Falling house prices only compound these problems.
- Unwinding of credit default swaps and other derivatives markets. There is over $60 trillion worth of credit default swaps. There is a concern that this unregulated financial instrument could cause problems as those who bought the default swaps are unable to actually repay them creating a ripple throughout the global economy
- Will Monetary Policy actually work? Central banks are rushing to cut interest rates. US rates are already 1%, they could go to zero. But, the experience of the Japanese is that 0% interest rates don't necessarily work in boosting growth when there is very low confidence and deflation
- Dollar Collapse? The dollar has held up well in recent months as investors flee emerging markets and seek the relative safety of the US economy. But, with US national debt increasing towards 70% of GDP, the Federal reserve is effectively printing more money. This could lead to inflationary pressures and a devaluation of the dollar. A devaluation of the dollar would effect the global economy as American spending falls even more.
There is hope that the recession will prove relatively shortlived. House prices in the US may be reaching near to the bottom. Cuts in rates should help homeowners. As long as the banking sector can regain its liquidity and willingness to lend we should avoid an economic meltdown. But if the financial crisis worsens and governments are unable to bail out the banks then we could see a serious depression.
0 comments:
Post a Comment