As a new year is about to dawn, despite (and perhaps because of) massive government and central bank intervention in advanced and major economies, worrying signs are proliferating along with the contrived optimism about a supposed rebound in global economic growth. Among the many clouds on the horizon regarding the global economic outlook for 2011, here are three:
1. Greek sovereign debt crisis not cured by the massive Eurozone and IMF bailout. Knowledgeable observers have pointed out that mathematically, it is not possible for the Greek state to deflate its economy in line with deficit reduction commitments required under terms of the bailout package, while simultaneously engineering a miraculous return to robust economic growth at a level sufficient to service the exploding public debt. There is already word being leaked to the Greek press by government officials that after the current bailout package expires in 2013, Athens will seek to restructure its sovereign debt.
2. Irish banking crisis far from over. After receiving a staggering level of bailout assistance from the EU and IMF to cover the country’s insolvency due to guaranteeing the obligations of Anglo Irish Bank ( along with all other banking institutions in Ireland), the Dublin authorities were forced to inject nearly $5 billion into Allied Irish Banks, another bankrupt institution. As with Greece, it seems almost a certainty that Ireland will eventually seek to restructure its public debt.
3. China, the one ray of hope in the global economy due to massive government injections of liquidity that have led to high levels of supposed growth during the global economic crisis, is now beginning to raise interest rates in a frantic effort aimed at reining in burgeoning levels of price inflation. This could lead to a tightening in the Chinese economy, combined with a catastrophic deflation in the Chinese real estate market. Any downturn in China will reverberate with dire impact on the overall global economy.
Other than these three items, no need to worry, as Fed Chairman Ben Bernanke and a horde of policymakers assure us that their bouts of quantitative easing and unprecedented levels of sovereign debt will somehow usher in a nirvana of good economic times. Unless, of course, you like I have no confidence in those who currently are the masters of our economic destiny.