And what happens when China’s economy crashes? What happens when China can no longer buy America’s hefty debt? What happens when China’s bubble pops and it tries to re-ignite its economy by flooding the U.S. market with extremely cheap goods?
The Irish bailout has ‘stunned’ experts. According to an article in the Guardian, Brian Lucey, associate professor of Finance at Trinity College Dublin said, “We’ve already put at least €32bn into them, so that’s going to be €67bn, which is 50% of GNP, that’s a world record” (read Irish bailout ‘stuns’ experts).
The additional money being thrust into Ireland’s banking system has shocked the financial and economic experts, but it also serves as a reminder of how fragile our world’s economy remains.
Ireland is not the first or last of the EU’s financial bailout problem. The EU authorities “had hoped that the Irish bailout would draw a line in the sand and halt the threat of Spain and Portugal needing international assistance. But tonight, investors and analysts were far from certain this would be achieved” (see Guardian link above).
Ashok Shah, a chief investment officer at London & Capital, said Ireland might enjoy temporary relief, but now the concern will switch to Portugal and Spain. “Portugal is already in the borderline, it will have to be rescued soon, maybe within a matter of weeks. The market will also focus on Spain. It will remain very volatile.”
In America, the economical situation is looking just as grim. Ben Bernanke just over a week ago demanded Congress help to ‘jumpstart’ the economy, because the Federal Reserve could only do so much. (read Bernanke: Congress Must Provide More Stimulus Aid)
Bernanke forcefully called upon Congress to provide more stimulus aid. Without more stimulus, “high unemployment could persist for years,” Bernanke said. At the summit of world leaders in South Korea, which took place mid-November, “China, Germany, Brazil, and other countries complained that the Fed’s plan would give U.S. exporters a competitive price edge by flooding world markets with dollars. A weaker dollar makes U.S. goods more attractive to foreign buyers” (see Bernanke link above)
And so what about China’s ‘out of control’ economy? Jim Jubak wrote earlier this year at MSN’s Money Central that China’s economy is headed for disaster. “In a train wreck, there comes a moment when it’s no longer possible to avert disaster…I fear that China’s economy passed that point of no return in the second quarter of 2006” (read China’s economy is out of control).
According to Jubak, China’s economy will suffer from “too much growth” and has led to overinvestment, which will, inevitably, lead to a hard crash.
Bloomberg reported in May that China’s crash could come in the next 9 to 12 months. Investor Marc Faber said, “China’s economy will slow and possibly ‘crash’ within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst” (read China May ‘Crash’ in Next 9 to 12 Months, Faber Says)
In the same article, hedge fund manager Jim Chanos says, “China is on a treadmill to hell because it’s hooked on property development for driving growth. As much as 60 percent of the country’s gross domestic product relies on construction.”
According to CNN Money, if China’s ‘bubble’ pops, China would flood the world with extremely cheap stuff in order to expand its economy. Since the U.S. is the biggest market in the world, much of that stuff would find its way into the American market, and that would maim an already struggling U.S. economy. “If nearly everything America buys is made in China now, just wait,” the article reads. “The trade imbalance would spiral further out of control…” (read What happens if China’s ‘bubble’ pops?).