A series of crises, the latest being the ominous developments in the Ukraine and further evidence of disappointing growth in China, have rattled financial markets. Of course, with all major central banks at amazingly easy policy stances, the bet continues to be that the latest uncertainties will also pass. That may be true once again. But, as Abe Gulkowitz lays out in the inimitable style of his The Punch Line letter, one must recognize that many of the serious flaws uncovered in each of the predicaments will linger for years to come and that the policy remedies have at best covered up the fundamental issues without completely resolving them.
Even in the U.S., the best of all major economies, the economy and financial markets still suffer from “lasting effects” of the Great Recession and seem yet to be able to muster up enough momentum to get back up to previous robust growth rates, especially for job growth. And the massive easing itself is likely to have its own potential for unintended consequences.
Serious and surprising weakness in emerging economies may also jeopardize growth trajectories for global recovery. The exposure emanates out of the greater vulnerability that world trade and growth have today from these super performing emerging economies.
This is particularly true for China, which by now has a stronger impact on the world’s economy, supply chains, commodity markets and world currencies. China is a key issue. Weaker growth, a complexity of debt issues, and awkward demographics, all combine to raise issues regarding the outlook. China’s debts are troubling – and not just because they’re alarmingly big. Amplifying the concerns is the complexity of those debts. That’s the trouble with China’s lengthening “credit chains”.
And in Europe, markets roared back as the euro crisis seemed to recede in the face of policy support. Yet basic job growth seems to be far behind. Unemployment is undermining many countries in the EU, not just massive debt levels. The unemployment is particularly severe for most of the younger age groups. Fertility rates are very low, and life expectancy keeps rising — trends that underpin the conundrum of demographic ageing. Even those countries performing relatively well are retaining a cautious stance about future prospects, and those performing poorly are still short of new ideas — and, in many cases, the adequate financial wherewithal — to alleviate weak growth prospects.
Full letter below in all its chartapalooza glory…