There’s a pessimistic mood in Westminster at the moment, a sense of gloom about
the economic prospects of the West. The government expects there to be another round of the European sovereign debt crisis this autumn and believes that the problems of the eurozone will take at
least a decade to resolve.
No one I’ve spoken to really believes that the plan Merkel and Sarkozy announced on Tuesday will be enough to keep the markets at bay for long. Looking across the Atlantic doesn’t raise spirits either given the state of both the American economy and political system.
But the global economic situation will get an awful lot worse if the Chinese bubble bursts. As Niall Ferguson points out in Newsweek, China’s growth rate is not built on solid foundations:
“When the Western economies first tanked in 2008–09, China’s communist rulers ordered the country’s banks to lend, lend, lend. The biggest borrowers were property developers and local governments. With inflation above 6 percent and the stock market down, the new Chinese middle class has gotten in on the act. An unknowable proportion of these new apartments have been bought as investments by people who already own one or more. With new-property prices up about 20 percent in just two years, who can blame them? Sound familiar? Yes, this looks a lot like a real-estate bubble—with Chinese characteristics. As for debt problems, Chinese bank loans were 97 percent of GDP in 2008. Now they’re at 120 percent.”
Leaving aside the potential Chinese problem, which is admittedly more of a medium term issue than a short term one, the world is fast running out of palatable solutions to its economic problems. As Nouriel Roubini tells Foreign Policy magazine,
“We are running out of policy bullets. The policymakers don’t have monetary bullets; they don’t have fiscal bullets; they cannot even backstop their own financial system. That’s why it’s more scary than a year ago, two years ago, or three years ago, when we had all these policy bullets. Now we are running out of them.”
As the Chinese would say, ‘we live in interesting times.’
Comments