Global Economic Crisis

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.

Having published numerous blogs over the past year on the evolving  sovereign debt crisis with the EU, I want to put these events into perspective. First point, the crisis continues to escalate, despite the several supposedly decisive (and costly ) measures enacted by European policymakers. Witness the bailout of Greece, and now the bailout of Ireland, along with the countless statements from EU political actors that these massive bailouts will prevent this crisis from getting worse. The reaction of the bond markets to the Irish bailout deal is a clear wet blanket being thrown at the EU.

Next point, given the disastrous track record of the European political class, it is highly unlikely they will prevent the next debt domino from falling, namely Portugal. After that, Spain, with a vastly larger economy  than Greece, Ireland or Portugal is almost certain to be the next country in need of a bailout. However, it is unlikely that  Europe will be able to cobble up the resources required for a bailout of Spain.

I therefore believe that the European debt crisis is now irreversible, and the only question is how severe the consequences will be. And a final point; the United States, which has only remained afloat due to its ability to borrow cheaply, has virtually all the same vulnerabilities as the struggling countries within the EU. Once the sovereign debt crisis strikes the U.S. with full fury, all bets are off.