Friday, December 31, 2010

Is 2011 the right time for a GE? - by Lim Sue Goan .

The world economy recharged powerfully like a turbo engine during 2010, but as the end of the year nears, it slowed down like an exhausted machine. It is expected in 2011, there will be more poor people worldwide who will starve because of unusual weather, the plummeting of food production and the rising inflation. Malaysia will not be spared, too..

In 2008, the US subprime mortgage financial crisis erupted, and caused a number of large financial institutions to fail or be taken over, triggering a global financial turmoil. Central banks of many countries then injected huge amounts of money into the financial markets.

In 2009, the financial markets remain volatile, and governments continued to inject funds to rescue the market.

In 2010, there were finally signs of rejuvenation, but the European debt crisis broke out.

In order to save the economy, the US printed a lot of money, causing hot money to scatter in the market. This gave rise to price inflation in gold, stocks, commodities, property and a variety of assets. Excess liquidity created the beauty of an economic rebound, but the money did not go into the real economy, but became a tool for speculation. This has brought its own latent crisis.

These are the changes predicted for the world economy in 2011:

First, the second quantitative easing by US successfully saves the economy, and the unemployment rate falls. This outcome is the most ideal, because the US can recover its loose monetary policy, and stop hot money from further harming the world.

Second, the US becomes like Japan and faces long-term deflation. Japan's economic bubble burst in the 1990s, and its economy has remained weak since. The Japanese government continues to pour capital into the economy desperately. But the interest rates fall to zero, because there is not enough consumption from the people. Prices fall, resulting in reduced profits, and inhibiting investment, which form a vicious cycle. The unemployment rate in the US is close to 10%, and is very similar to that of Japan.

Third, the debt crisis in Europe erupts. Even though the European Union and the International Monetary Fund (IMF) tried to rescue Ireland together, and expanded the scale of EU financial stability fund, the crisis is not yet resolved. If the market confidence should collapse, then debt-ridden US and Japan may become another tipping point, and ultimately a currency war may break out.

Fourth, the asset bubble bursts. There appears a big bubble in the Asian real estate and commodities, causing hot money to raise oil prices to more than US$100 a barrel next year. Then, any sign of trouble, including continuous action to raise interest rates to curb inflation, is likely to burst the bubble.

If the first possibility occurs earlier than the other possibilities, then the global economy will be saved. If we cannot wait for the US economic recovery, then we would have to wait until the debt crisis and the bursting of the bubble. The world should pray for the quick rebound of the US economy and that the Chinese economy can sustain its development.

For Malaysians, fortunately there are government subsidies, so that prices rise less rapidly. But we are still unable to avoid import inflation. When oil prices rise above US$100, how much subsidy can the government then grant? It would be wise to be psychologically prepared to meet the hard times.

In this severe external economic environment, the Government should increase efforts to promote economic restructuring. If it continued to fight against the opposition in political battles, it would undermine investor confidence. The Government should not be distracted by the anticipated electoral war..

The people’s real concern is their rice bowls. If the economy deteriorated, then next year would not be a good time for a general election. -

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