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Print Edition> Business
UPDATED: January 17, 2011 NO. 3 JANUARY 20, 2011
Crisis Focus: New Year, Same Problems

While the new year offers the opportunity to start anew, the economic outlook for 2011 and years to come may not take on a fundamentally different appearance from the past few years. Andy Xie, an independent economist based in Shanghai, discussed this issue and the outlook for the coming year in a recent article for Century Weekly. Edited excerpts follow:

Unfortunately, we're unlikely to see a true end to the financial crisis in 2011. The world economy is temporarily calm as a result of Western countries' fiscal and monetary stimulus policies and the asset bubbles in developing countries. But the fundamental problems of the 2008 financial crisis have not been solved. A new round of the crisis, which can be triggered either by continued financial strain in Western countries or inflation in developing countries, may even break out at the end of 2012.

Three factors overshadow our economic outlook for the coming year.

First, since the U.S. Federal Reserve's second round of quantitative easing was introduced last November, oil prices have increased about 20 percent. Is it out of real demand or the expectation for soaring money supply? I think it's more for the latter reason. Although the world saw an increase in oil consumption last year, it was still lower than in 2007 and 2008. In addition, no fundamental change has taken place in the world economy, which can account for the oil price hike, so the real culprit for the rising oil prices is not demand.

Second, the U.S. Treasury bond market plummeted. The Treasury bond price drop actually signaled a dampened investment return. Obviously, no government could live on issuing bonds endlessly. The U.S. Treasury bond yield is not sustainable. The fact is that the Fed is just too dependent on a future propelled by greenback oversupply, which will surely make inflation happen.

Third, as China tightens its money supply this year, it may encounter more thorny problems when it comes to inflation and the property market. This round of inflation in China is, to some extent, related to the current financing method of the property market—in other words, government-backed banks providing loans to the property market. But China's property market is too big to fail, so we're likely to get dizzy just thinking about how China will thoroughly and effectively tame this inflation.

As we can see, the structural problems, represented by high social costs in developed countries and high inflation and assets bubble in developing countries, menacing the world economy have not been solved.

High social costs in developed countries demand tight money supply and reform in redistribution. European countries have made such efforts—the French Government extended its retirement age recently—but these efforts are not enough.

The indicator to gauge the successful elimination of these problems is the stable proportion of national debt in GDP. Unfortunately, most developed countries have done little to improve this and what the United States is doing now will make things even worse.

While emerging economies are growing vigorously, the risk of inflation and asset bubbles are also approaching. If handled inappropriately, it will destabilize the emerging economies. In fact, after years of accumulation, emerging economies are facing the risk of hard landing and also a new round of financial crisis.

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