Sunday, December 25, 2011

possibility of a global economic collapse in 2012

possibility of a global economic collapse in 2012 : The World Bank expects the real global GDP growth to be 3.2 percent in 2011. Indeed, current economic data suggests that the U.S. is on pace to grow at a modest pace and emerging market countries like China are still soaring. Still, some analysts have not ruled out the possibility of a global economic collapse in 2012.

Michael Pento, President of Pento Portfolio Strategies, sees major risks in the sovereign bond market of the developed world.

The truth is that Europe, and quite possibly Japan and the U.S., face a recession in 2012 due to a full-blown bond market crisis,” said Pento in a research commentary.

The Eurozone is already on the brink of toppling. The yields on the 10-year debt of Italy and Spain are near 7 percent, a level that is likely unsustainable. If this trend of rising yields continues, these two countries will go the way of Greece.

Nouriel Roubini, the chairman of Roubini Global Economics who famously predicted the 2008 global financial crisis, recently said the “the endgame for the Eurozone has begun.”

Greece’s sovereign debt crisis derailed its economy, which contracted 3.5 percent (in real terms) in 2010. If Italy and Spain suffer a similar fate as Greece, the entire interconnected economy of European Union could crash.

“Many investors continue to overlook the profound ramifications of having the largest economy [European Union] on the planet fall into a steep recession,” said Pento.

While a substantial number of analysts see a real risk of a sovereign debt crisis in Europe, not many fear one for the U.S. and Japan. For Pento, however, sovereign default is a matter of mathematics.

“History is replete with examples that indicate once a nation reaches a debt to GDP ratio of between 90-100 percent, two pernicious conditions begin to appear,” he said.

First, public debt drains capital from the private sector, which stymies economic growth.

Second, the bond market no longer believes the country can repay its debt (partly because of the slowed economic growth). The market then charges the country higher borrowing rates, which leads it down a spiral of debt unsustainability.

At the end of the 2010, the debt to GDP ratio was 94 percent for the U.S., 220 percent for Japan, and 119 percent for Italy, according to the IMF.

Pento said eventually, these countries will either have to outright default or print their way out of their debt. Both scenarios, he said, will be deleterious to the economy.

Not all experts, however, believe high public debt necessarily leads to a sovereign debt crisis.

For the U.S., most argue that the U.S. dollar’s reserve currency status and the U.S. role as the world superpower should protect it from a sovereign debt crisis, even at a 94 percent debt to GDP ratio.

For Japan, some argue that its current-account surplus and loyal domestic investors can continue to sustain its enormous public debt level.

For Italy, however, it is harder to make such optimistic arguments, especially because the market has already begun to voice its displeasure. If Pento is right about just Italy, 2012 looks to be rough year for the global economy. For the latest updates on the stock market, visit Stock Market Today
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