Continuing Global Risks Spur Caution Statement From G20 Nations

Monday, February 18, 2013 07:40
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Continuing Global Risks Spur Caution Statement From G20 Nations

Tags: Economic Outlook | European zone | world economy

The G20 nations met this weekend and tried to address the uncertainties that still characterize the global economy. And there are a number of them.

 
Fears of a currency war aside, the desperate search by investors for yield is once again fueling potential bubbles in various assets across the globe.

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The vast liquidity injected by global central banks is leading to asset-price inflation while consumer prices remain low.
 
And Europe’s economy shrank more than forecast during the fourth quarter, adding more uncertainty about when the region’s recession will end.
 
Huge mergers and acquisitions of late are stirring thoughts of another leveraged buyout (LBO) boom, causing concern that the seeds for the next crisis in the financial markets are being sown before the current one is over.
 
Speculation is over which retro decade the next decade will resemble: the 1970s or the 2000s?
 
The ‘70s were characterized by currency wars, rising inflation, rising unemployment, and political uncertainty.
 
In the ‘00s investors clamored for yield, monetary policy was easy after the dotcom crash, and bubbles began to rise in real estate, emerging market equities, and the European corporate-credit market.
 
The G20 issued a statement urging governments to refrain from competitive devaluation of their currencies because excess volatility of financial flows and disorderly movements in exchange rates do not bode well for financial and market stability.
 
Loose monetary policy is the primary weapon against the threat of currency wars, which for the moment are more talk than reality. But easy policy carries the risk of creating asset-price bubbles.
 
Will this decade resemble the ‘70s or the ‘00s? Or will it take a more benign track than either of those? Which risks will prove greater to the global economic recovery?

 

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