24/07/2012 - 09:50

Analysis: warning of a perfect storm

24/07/2012 - 09:50

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Spain and Germany combined last night to refresh the chilling warning from Nouriel Roubini that the world is heading into a perfect economic storm, though there are also signs that the storm might be less severe than feared.

The bad news first, because while it makes for grim reading, it could also be that Professor Roubini (or “Dr Doom” as he sometimes called), might be over-cooking his case – a point that regular readers of WA Business News will acknowledge.

Sharply higher borrowing costs incurred by Spain on its two-year debt sent global markets down sharply last night because at a record high interest rate of 6.74 per cent fears were refreshed that Spain could be shut out of the debt market, plunging over the same fiscal cliff as Greece.

Germany, until now a stronghold of economic prudence was also sucked deeper into the European crisis when Moody’s Investors Service cut its outlook from stable to negative, along with two other relatively strong countries in the region, the Netherlands and Luxembourg.

Europe’s deterioration from a slow-motion train wreck to a high-speed train wreck is top of Roubini’s five negative points which he says will combine to deliver his perfect storm, making 2013 a worse year than the 2008 global financial crisis.

His other four points are: the U.S. plunging into recession because it will be forced to raise taxes and cut spending, China suffering a hard landing, emerging markets slowing, and oil prices rising because of war with Iran.

Given his track record of correctly predicting the 2008 meltdown it would be unwise to dismiss Roubini as a modern day version of Hanrahan, Australia’s great pessimist brought to life in John O’Brien’s poem, with his warning that: “we’ll all be rooned” if it doesn’t rain, and repeating the warning after it does rain.

The question is really whether the world is better prepared this time because so many people could see that a second version of the GFC was brewing that they have been making preparations for the storm.

The first clue that this time much of the world is ready can be found in the cash reserves accumulated by most big companies. Australian banks are cash to the gills, while the world’s eight biggest mining companies have boosted their position of having debts totalling $US88 billion in 2008 to a current cash surplus of $US86 billion.

That swing of $US174 billion is a pointer to how much boom-time money was saved by the miners – and a measure of how badly the Australian Government managed the boom by missing the opportunity to put something away for a rainy day.

A second clue that a storm is on the way came from observers far less qualified than Professor Roubini with even this column warning on January 10 about what happens: “When a boom deflates”.

Back then I was soundly criticised by a handful of readers and denounced as “the most negative person in the universe”, an accusation that would have annoyed Professor Roubini as he clearly believes he is the holder of that title, along with the tag of Dr Doom.

In any event, letter writers such as Jack and Neil, called for more optimism, an indication that they were in sync with the Australian Government, marching blindly into the storm rather than adopting a safety first approach.

Interestingly, four of the issues raised here in January: “rising costs, failing commodity prices, tight money, and lingering fears over China suffering a hard economic landing” were in line with what Professor Roubini said last week.

Bragging is never pretty, but the point about that early January view of the world is that if an enthusiastic amateur could see trouble brewing then most professionals should have been even further ahead.

The only people who do not seem to have got the message are western-world politicians who have foolishly tried to stem the tide, and shore-up their electoral support, by splashing out with more social-welfare spending and higher taxes when frugality would have been far wiser.

With the seeds of the 2013 crisis sown there is not much anyone can do to avoid the storm I saw in January, and Professor Roubini upgraded to a “perfect storm” last week.

But, the fact that so many people did see it coming is a sign that when the storm breaks it will probably not be as damaging as 2008 ... (said with fingers crossed).

 

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