An economist is warning the world economy is facing conditions that could lead to a financial crash worse than 2007 and 2008.
In an interview with the The Telegraph published Tuesday just ahead of the World Economic Forum, William White said the “macroeconomic ammunition to fight downturns is essentially all used up” and many of the debts that have built up over the course of the past eight years will never be repaid. White is chair of the Organization for Economic Co-operation and Development (OECD)’s review committee.
The economist said the low interest rates provided by central banks and quantitative easing used to kick start recovery the last time around have fueled credit bubbles in East Asia and emerging markets – leading to both private and public debt reaching historic levels.
“Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem too,” White told the paper.
With central banks unable to lower interest rates much more and the economic slowdown in China, many economists fear it could be the start of a global financial meltdown.
Last week, the Royal Bank of Scotland sent a note telling its clients to dump everything but high quality bonds, saying they expect the markets to fall somewhere between 10 and 20 percent.
“In a crowded hall, exit doors are small. Risks are high,” RBS wrote.
J.P. Morgan has also taken a bearish stance on the markets.
“Our view is that the risk-reward for equities has worsened materially. In contrast to the past seven years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally,” J.P Morgan equity strategist Mislav Matejka said in a report.
The slowdown of China’s economy, which is the second largest in the world, did not come as a surprise to all. Ruchir Sharma, the head of emerging markets at Morgan Stanley Investment Management, told Bloomberg in July the country’s slowdown has the potential to cause global economic growth to fall below 2 percent.
While many are warning of a financial Armageddon, other experts say it’s too soon to panic.
“It is too early to say whether this is a crisis of lasting proportion but I think we should certainly continue to focus on addressing the challenges that are there for all. China may have slowed down but it’s not stopped,” Sir Roger Carr, chairman of BAE Systems, said Wednesday at the World Economic Forum in Davos. “Europe is fragile but is focused on improvement and with the U.K.’s engagement in encouraging a more competitive Europe.”
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