Conditions for another crisis 'are with us': Smithers
Debt levels are too high and rising, while stocks and bonds are priced "dangerously high," economist Andrew Smithers argues
"The conditions required for financial crises are massive debts and sharp falls in asset prices," Smithers, who warned that Wall Street stocks were overvalued just before the dotcom bubble burst, wrote in a new market report.
"Debt levels are still too high and some are rising again. Equities and bonds sell at dangerously high prices. The conditions required for another crisis are with us," he added.
Smithers said that the current stimulus policies, whether monetary or fiscal, are only suitable for cyclical weakness whereas there are some structural savings surpluses in the developed world that need to be addressed.
The fact that stimulus policies have failed has a silver lining, though: if they were successful, "they would end in tears as inflation and inflationary expectations would pick up," he said.
"Fortunately the marked tightening of US fiscal policy is likely to contain inflation expectations," Smithers added.
In his opinion, the policies that are needed to for the global economy to recover are fiscal stimuli in Germany and in China, a cutting back of fiscal expenditure and shrinking budget deficits in Japan, the UK and the US, weak exchange rates for the pound and the yen, an end to quantitative easing and addressing the "perverse incentives of the bonus culture in the UK and the US," as well as "excess depreciation allowances in Japan."
The UK and the US must recognize that they have structural savings surpluses in their business sectors, caused by the bonus culture, Smithers wrote in his report.
"The Federal Reserve must recognize that US asset prices are dangerously inflated and that quantitative easing is the cause," he added.
Policymakers in emerging markets have accused developed countries of sending hot money inflows into their currencies by printing money, but Fed chairman Ben Bernanke in a speech in London said that this was not the case.
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Smithers said that the upward trend in inflation in the US was inconsistent with the Fed's assumptions that there was a large output gap, that the demand weakness which caused it was cyclical rather than structural and that inflationary expectations were limited.
"If the Fed's assumptions were correct, inflation would be on a falling trend. It isn't," he pointed out.
Profit margins for US companies are "at record high levels" and attempts to hold profits up by "aggressive pricing" are likely to push up inflation and reduce growth, reducing the fall in the fiscal deficit, Smithers added.
On currency wars, he slammed protests by China against developed nations' attempts to weaken their currencies.
"China has increased its foreign exchange reserves by $3 trillion over the past decade... so this warning seems the equivalent of Germany blaming the outbreak of the First World War on Belgian aggression," he said.Countries with large current account surpluses and low fiscal deficits, such as Germany, are the ones that need to run "significant" fiscal deficits to help the world economy rebalance, Smithers added.
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