The question is whether consumers can maintain sufficient demand to power the economy by themselves or if deflationary pressures will reemerge as soon as the gigantic injections of monetary and fiscal stimulus run out?
Also, there are troubles are brewing around the world that could push the economy back into crisis. For example, many analysts now believe that China is headed for a hard landing. Here's an excerpt from fund manager Gary Shilling's 4-part series on China on Bloomberg News:
"China is much more vulnerable to an international slowdown than is generally understood...China's reliance on exports and a controlled currency for growth, for instance, will no longer work if U.S. consumers are engaged in a chronic saving spree, as I believe they will be. Chinese export growth, which averaged 21 percent per year in the last decade, is bound to suffer....
"Inflation Looming...China's state-controlled economic boom may soon lead to crippling inflation. In February 2010, the director of the National Bureau of Statistics said that "asset-price increases pose a challenge for macroeconomic policy."
The housing boom has pushed up prices to the point that apartments in Beijing are affordable to only the top 20 percent of earners -- they're selling at about 22 times average income (average U.S. house prices peaked at six times average income). A square meter of property in China costs an estimated 164 times per-capita income, compared with 33 times in high-priced Japan...
The government is fearful of rising prices, and has moved to prevent speculation. Buyers must now put down 60 percent of the purchase price on second homes, and 30 percent on first homes. The government is pressing banks to contain mortgages, and some have raised interest rates." ("Shilling: China Heading for a Hard Landing", Bloomberg)
So, why is China finding it so difficult to fight inflation?
Mainly, because a shadow banking system has sprouted up and is providing massive amounts of credit outside the traditional "regulated" banking system. That's adding to the money supply and driving up prices. Here's the story from guest author Waiching Li at Credit Writedowns:
"According to a study issued by the People's Bank of China in 2010, non-banking sector lending has expanded to 63.3 trillion Yuan, ($10 trillion), 44.4% of total lending activities of China's economy.
"Shadow banking, a concept coined by the US Federal Reserve, refers to non-banking financial institutions with some banking functions, but they are not or less regulated like a bank. In the U.S., the lack of regulation for the securitization of traditional financial products, including home loans, was one of the major causes of the financial crisis.
"Shadow banking in China mainly exists in the form of 'Bank and Trust Cooperation,' the underground financing networks; but small loan companies and pawn shops also play a role in these shadow financing activities.
"While mortgage securitization is not an issue in China, the 'Bank and Trust Cooperation' is a vehicle to provide 'hidden' loans to enterprises outside the scope of the bank's reserve limit. Similar to the credit securitization problems in the US, the banks play the role as an intermediary. ....
"Data released on March 31th, by China Trustee Association, shows that the scale of Bank and Trust Cooperation as has already reached to 15.3 trillion yuan ($2.35 trillion). The risks of such financial arrangements are asymmetrically transferred to buyers. Since no credit ratings are available for these debts, the buyers have to blindly follow the bank's referrals, hoping the banks, which make money from commissions and fees no matter what happens with the loan, have done due diligence and are honest." ("The Shadow Banking Problem in China," Credit Writedowns)
Unregulated "shadow" banking inevitably ends in disaster because loan-quality gradually deteriorates and that leads to panic selling. This is essentially what happened at BNP Paribas when they suspended withdrawals at their 3 funds; they became suspicious of the underlying collateral (subprime mortgages) and that sparked a bank run in the repo market. China will face the same problem if the government doesn't reign in its shadow banks and control the flow of credit.
There are also troubles in the eurozone which could send the global economy sliding back into recession. George Soros warned last week, "We are on the verge of an economic collapse which starts, let's say, in Greece, but it could easily spread. ...The financial system remains extremely vulnerable."
Greece will eventually have to restructure its debt as its debt-to-GDP ratio continues to widen each year it stays on its present payment schedule. Greek Prime Minister George Papandreou is willingly gutting public assets and laying off 20% of the public workforce to appease foreign bondholders who refuse to accept haircuts on their investments. Here's economist Mark Weisbrot summing up the goings-on in Greece:
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