I’m really surprised that this comment from John Key hasn’t elicited more reaction:
“[Future] recessions are almost certainly in my view going to be global in nature and probably more severe… I think the question is not whether there is going to be another global recession but when that recession is going to hit.”
I wrote the other day about the rock and the hard place that the world’s economy finds itself between.
On the one hand, any economic recovery will see oil prices quickly rise to economically damaging heights. We are near or at peak oil and the manifestation of that will be repeated recession-causing supply crunches, like the one the IEA predicts for 2012.
On the other hand, the toxic assets that the banks loaded themselves up with haven’t disappeared, they have just been bought up by governments or by institutions using money they’ve borrowed from the governments for free.
The governments have funded this effort to save capitalism from itself with massive borrowing from the same banks who they bought the toxic assets off and who are now making a mint lending the government’s money back to themselves. On top of that, governments had to maintain their spending and stimulate their economies to end the recession. So, they loaded with debt.
Which will cause the next global recession? Dodgy debt or expensive oil? Looks like debt.
All of a sudden the steady rise in oil prices has reversed. In fact, the price has dropped 20% in the last month. That’s not because of some miraculous new cheap source of oil coming online. It’s not because suddenly oil economies are able to grow with less oil. It’s because the markets are losing their faith in the global economic recovery. The source of their concern: European sovereign debt.
The rich Euro states have put 700 billion into backing their currency. It was intended as a show of force to calm the markets and stop them losing faith in debt from Greece and the other PIGS. It doesn’t seem to be working. (it may also drive the EU into a fiscal union to match its monetary one, which I support).
If a major sovereign debt crisis doesn’t eventuate then confidence and growth will rebound, oil demand will grow, production won’t be able to keep up, and a supply crunch will hit us. The International Energy Agency and a bunch of other groups are picking that will happen around 2012.