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Experts Warn of Shaky Economy

blog | Published On 1/12/2016 2:27:21 PM by Everett Millman

financial-crisis-544944_1280One cannot ignore the writing on the wall about the world economy, especially when prominent experts in the field are voicing dire warnings. Such ominous predictions about the potential global doom around the corner are coming from several different sources. The lack of credibility for establishment leaders notwithstanding, we will view the outlook for the global economy from the perspective of three ostensible authorities: investor George Soros, economist Lawrence Summers, and the World Bank.

In a way, these sources represent the left, right, and center of the political spectrum, respectively.

GEORGE SOROS

At a recent economic summit in Sri Lanka (the small island nation due south of India), George Soros shared his view that the global economy is entering a new crisis. In his judgment, the crisis resembles that of 2008.

Photo: Michael Wuertenberg Photo: Michael Wuertenberg

One of Soros' main culprits is China. The slowing down of the Chinese economy is going to be a difficult adjustment in his eyes. The weakness of the yuan is a concern for emerging markets in general, and the rest of the globe has been dragged lower by the developments in China.

The evidence early on this year seem to confirm Soros' fears. Volatility has been rapidly rising since the calendar changed to 2016, with the VIX index rising 13% already. The global equities market has lost $2.5 trillion already thus far in 2016, and we're not even 2 weeks into the new year.

While Soros has made similar warnings before and is somewhat echoing other mainstream economic pundits, he has also built a $27 billion fortune by being correct on such calls, so he possesses a powerful track record worth considering.

LARRY SUMMERS

Lawrence Summers was the Secretary of the Treasury from 1999-2001 (during the end of the Clinton Administration and the beginning of the Bush 43 Administration) and also served as an economic advisor in the Obama Administration from 2009-2010.

These credentials make Summers the establishment antithesis to Soros. Yet, the two men are expressing essentially the same concerns over a global financial crisis.

Photo: Monika Flueckiger Photo: Monika Flueckiger

Late last year, Summers began warning of impending crisis for global economy. He outlined how the lack of global growth (secular stagnation) was causing a vicious cycle between emerging markets and developed economies. He warned that the global system was "in serious danger" due to monetary policymakers having already exhausted the tools at their disposal.

He subsequently reiterated this view recently, especially now that some of the early data for 2016 is available. Summers points out that signals from the speculative (or predictive) markets have proven remarkably accurate in the past and therefore shouldn't be ignored. Unsurprisingly, the speculative money is betting on rough economic conditions ahead. Summers thinks policymakers ought to be preparing for the worst.

Soros the investor and Summers the economist are not the only people in their fields that have issued such warnings, but they are undoubtedly two of the most prominent voices on the subject.

WORLD BANK

worldbankThe supranational World Bank can be understood as falling somewhere between Soros and Summers on the political spectrum.

Observing that global equities have had their worst opening to a year in anyone's memory, the organization cut its global GDP growth projection for this year from 3.3% to 2.9%. That 2.9% is carried heavily by advanced economies like the U.S., as the World Bank sees struggles for emerging markets thanks to manufacturing weakness in China.

Ayhan Kose, director of the bank's development prospects group, warned that “the risk of financial turmoil in a new era of higher borrowing costs remains." On top of this, trade activity as measured by the Baltic Dry Index has fallen to an all-time low. Although these comments from the World Bank, like those presented earlier, are still only forecasts, it seems like the right time to take notice when so many experts are worried about the economic outlook for 2016.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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