Reject the Consensus: 'V' Means Vulnerable

Major economies reported strong growth for the first quarter. In the United States, for example, GDP grew 3.2 percent from the fourth-quarter level. Year-on-year growth rates were not far behind.
 
East Asian export-oriented countries reported even stronger data than those in the West. As a group, they probably grew twice as fast as the United States. And their second-quarter reports are likely to reflect similar strength. Meanwhile, the International Monetary Fund has upgraded its global, 2010 GDP growth forecast to 4 percent.

All these positive statistics raise an important question: Are we in the midst of a V-shaped recovery following the economic collapse that began in the second half 2008?

The answer is no. I think the current recovery is merely based on government stimulus and low-base effect. And given the amount of stimulus spending, this is not a strong recovery. More importantly, structural problems exposed by the financial crisis were merely covered up, not resolved, by stimulus spending. This is why the recovery is not sustainable.

Since stimulus will eventually lead to inflation, interest rates will have to be raised. That will lead to another dip in the global economy. I expect this second dip in 2012, which means we are en route to a W-shaped economic phenomenon, not a V-shaped recovery.

When so many people are bullish about an economic outlook – and offer lots of data to support their optimism – it is easy for little people like you and I to be persuaded. But one should always question the consensus. You don't have to poke too deep to find holes in the latest recovery story. One year ago, the consensus was that the financial crisis was the most serious in 60 years. Now, the doomsayers have changed their tune. How can things change so dramatically in just a year?

In early 2009, I predicted the people who were panicking at that time would declare everything fine by the end of the year. I also thought that, in the middle of the crisis, policymakers around the world had decided to err on the side of too much stimulus rather than too little. These predictions have come true. So the latest growth rates should be analyzed in that context.

Here's what's really happening: Major economies such as the United States and Britain are running fiscal budget deficits exceeding 10 percent GDP. Deficits in Europe and Japan are half that amount. Interest rates around the world are close to zero. When viewed in this context, 4 percent global growth is not impressive. Actually, we should be asking why the global economy isn't growing faster.

But can individuals like you and I make sense of what's happening in our huge global economy, with its roughly US$ 60 trillion in gross output and more than 6 billion people? More importantly, can we identify unsustainable trends and make the right decisions to avoid collective or personal losses?

In fact, it's impossible for an individual to gather and analyze all the data needed to reach meaningful conclusions. We have to rely instead on government agencies. But bureaucrats are slow, and they're usually too late in delivering data and analyses. In addition, some agencies massage data to achieve desired financial market reactions. As a result, a lot of little people have been force-fed misinformation. They've been left to search for answers in the dark before being led to the slaughterhouse.