Economy

Next downturn is coming soon, says economist

By Wang Ying (China Daily)
Updated: 2011-05-17 13:15

SHANGHAI - Even as a number of economists are predicting that another economic downturn will occur in the United States between 2012 and 2013, a Chinese economist is saying the troubles will come much sooner.

Wang Jian, an economist famous for making provocative statements, thinks the next downturn will be seen after July this year and will be even worse than the one that hobbled the US economy in 2008.

"After the sub-prime mortgage troubles, public data show that the US government froze its toxic assets between 2009 and 2010," Wang, secretary-general of the China Society of Macroeconomics, an affiliate of the National Development and Reform Commission, told the China Securities Journal on Monday.

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"But such toxic assets will not vanish by themselves. Traditionally, a standard financial derivative contract lasts for five years. So the toxic assets that triggered the sub-prime mortgage troubles in 2007 were signed before July 2002."

Wang explained that the explosive increase in the use of financial derivatives took place between 2005 and 2007.

"Take credit default swaps as an example. Their total capitalization was at $920 billion in 2000. That snowballed, under loose lending conditions, to $6 trillion in 2004, and further increased to $62 trillion in July 2007," he said.

According to his calculations, the derivatives that are coming due this year and next year are worth 10 times as much as the ones that caused the latest downturn and will deal a catastrophic blow to the global economy.

Wang's projection was echoed by other experts. Chen Daofu, director of the policy research center at the financial research institute of the State Council's Development Research Center, told China Daily that the quantitative easing monetary policy adopted by the US will cause further disaster for the world.

"Since the financial crisis, the US has used the policy to cover up its problems temporarily," Chen said. "But the policy undermines the future economic development of the United States, and more troubles are looming in the future."

After the recent downturn, a large number of American home buyers decided not to pay off their mortgages after seeing the prices of their homes drop by 40 percent. By the end of 2010, more than 5 million US families had not made payments for more than two months to the mortgage lenders they were indebted to. As more people refuse to make such payments, a further downturn is unavoidable, according to Wang.

The US is also faced with a loss of trust. In years past, more than 60 percent of the national debt issued by the US has been purchased by US enterprises and residents. This year, though, about 70 percent of the newly released debt was purchased by the Federal Reserve, while the remaining part was sold to China, Japan and the UK.

The US central bank's second round of quantitative easing, in which it is buying up $600 billion in US Treasury bonds, is scheduled to end in June.

Since February, China, the buyer of most US debt, is purchasing fewer Treasuries. Another important buyer, Japan, is recovering from the catastrophic earthquake that struck it in March.

"In order to restore the world's confidence in the US economy, the US needs to strike a balance between economic growth and inflation," Chen said. "But this task is becoming more and more difficult."

Wang also believed the current unrest in the Middle East and North Africa has a lot to do with the US economic crisis.

"In order to bail out the US economy and the dollar, the US has stirred up unrest in the world, so that global capital will flow back to the country," he said.

Yin Xingmin, a professor from Fudan University disagreed with Wang.

"What's happening in the Middle East and North Africa results more from the fragility of the local economies and from high inflation rates than direct intervention from the US," Yin said.