The biggest threat to the global economy will not be the high levels of household and corporate de...
The biggest threat to the global economy will not be the high levels of household and corporate debt or even the current oil prices, but inflation, said Anatole Kaletsky, economic commentator for The Times, at Ashburton's London Investment Conference.
Although Kaletsky does not feel inflation will return to double digits because of global competition, he thinks an increase as far as 4%-5% could be devastating to the economy if budget deficits continue to expand and the dollar falls.
The US economy and its deficit is currently being supported by Asian governments buying US treasuries. However, this can only continue as long as inflation stays low.
Kaletsky thinks the idea that debt is a huge threat in either the US or the UK simply does not stand up. Companies are as liquid as they have been for decades. Households may have borrowed quite heavily, but their assets have gone up even more - so much so that US households now have stronger balance sheets than at any time in history apart from the very brief bubble period.
In the UK, Bank of England studies have shown that most of the money extracted through equity release from the housing market has actually been saved, not spent.
Kaletsky said: "It is worth noting that, relative to disposable incomes, property is still less expensive than it was in the late 1980s and that is before we account for the fact that interest rates will probably peak at one third of the level they reached in 1989.
"The real economic problem in the UK is not the threat of a house price crash but the alarming growth of public spending, accompanied by ever more intrusive bureaucracy and government regulation. In the last three years, the public sector has accounted for all of the UK's employment growth."
In regard to oil prices, Kaletsky thinks if the price does not climb much higher than $50 it should not do too much harm. This is because, in real terms, the oil prices is still only half what it was 25 years ago. Because of the fall of the dollar, the oil price for other countries has been considerably less steep.
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