[2010 Int'l Financial Forum] Full Text of Song Hongbing Presentation

There are two opposite opinions about how the global economy develops in the future.

An optimistic group claims that the economic crisis is over and now on the right track of development.

A pessimistic group sees the world economy face worse crisis and I belong to the second group. I believe that the global economy will face second crisis in either 1st or 2nd half of next year and that Europe will experience with more difficult situation.

Let me present you how I analyze the problem and make such a conclusion.

As you all are well-aware, the global financial crisis hit the globe in 2008 and many countries started implementing the powerful measures to stimulate their economies. In spite of such efforts, we now see many side effects by the package.

The biggest problem is that the government supports the national economy by pouring huge money into the market. As a result, the national economy now sits on the huge debts.

In the past, the government used to issue the national bond in bulk as a way to reduce mounting debt. Under this circumstance, the gross domestic product goes up in effect, but debts grow bigger and bigger.  

The key is whether the GDP increase speed up the level of debt rising.

In case of US, in the first quarter GDP growth reached 3 to 4 percent while the debt grows more than that of GDP. Now, the country is in urgent need for more liquidity to see higher number of GDP rate, which leads to lower economic efficiency of national economy.

In result, the excessive bond issuance causes the accumulation of debts. Public debt crisis in Europe can happens in the US, as well.

I predict this will come between 2012 and 2014.

Now, the US economy ekes out its massive package by the government.

A recent statistics shows that new credit lending in May decreased by about 30 percent, which is the largest one-month drop.

This can cause more vulnerable side of economy given the fact that it starts to show a sign of recovery.

The economy will find hardship because banks begin to lend less under the circumstance of tight job market.

One cannot afford to buy the house if he/she does not have a job in spite of extremely low interest rate.

In other words, the economic stimulus package of US cannot the final solution to the problem in the continent. Massive debt is nothing but a huge burden on American economy in the future. Debts will be the major trigger for the economic crisis in the near future.

You can see such a trend in the history, as well. American economy reported the increasing debts for 80 years after the great recession.

A country is similar to a company. You can cross check the corporate health by comparing the total amount of debts with annual profits.

In 1920, America saw its public debt reach 300 percent of GDP and it took a decade to get rid of the national debt.

After that, US economy seems to recover its power. The local consumption rose and the economy saw development.

Now, if you look at the recent 10-year data, American debt ratio to GDP increased. It now reaches 350 percent.

Allan Greenspan, former head of Federal Reserve, has also mentioned that 2008 financial tsunami was unprecedented for the past 80 years. That is because he has never seen such a huge debt.

Now the ratio of debt to GDP is a real threat to overall economy and the world confirmed such a fact and felt the new crisis coming.

How much effort will be needed in order to repay the debt if the liability is three times higher than the level of total asset or the economic ability? This is the debt crisis we are talking about. A default on debts means the immediate crisis.

Every nation has a problem of debt and in a short term, it might have a limited influence on the economy. The economy can grow fast if we spend up the money we earned for the next three years. Then what? What will come next?

When I was writing the first book of ‘Currency Wars’, the private and public debt of America in 2007 reached 48 trillion dollars. In 2009, the debt rose to 57 trillion dollars when I was working on the sequel.

It means that for the past 2 to 3 years, the national debt in US increased by 10 trillion dollars while its GDP rose by 1.1 trillion dollars.

How long the US government can stay under this kind of pressure. Sooner or later, serious problems will rise up, I believe.

A debt is one way to suggest a future trend of US economy and leave a clue to economic recovery. The situation will get worse if the debt gets bigger in the short term and snowballs along with principal and interest.

The US should keep printing dollar to pay off debt. In a short period of time, the US dollar will be strong, but that doesn't mean strong purchasing power. In terms of purchasing power, the US dollar will continue to be weak.      

I expect that the US will face with another wave of crisis in 2012.

The US should pay back its national debt from the year of 2012 and the amount of debt which has been accumulated for 10 years is tremendous. The amount of debt will be over 9 trillion dollars and I guess the US can't raise funding to repay its huge debt and dollar will eventually collapse. 

The financial crisis in Greece currently spreads to other European countries such as Portugal and Spain like dominoes.  

Last December, we have seen Dubai crisis and now we see crisis in Greece inflecting Portugal, Ireland and Italy. The possibility this financial crisis affect Japan and the US cannot be ruled out.

Many countries suffer from the burden of excessive debts and the similar scenario can happen in other regions since debt is the core to problem. 

I described the US dollar as the Titanic in the book. The Titanic was crushed into glacier and sank to the bottom of ocean. The size of a ship doesn't matter. Problem can rise up when it hits by a serious attack. 

See this at the level of nation. When a ratio of debt to funding that one country can provide continues to rise, the country will end up facing with circumstance it cannot afford to pay off its amounting debts.
 
Issuing national bonds to stimulate the economy cannot be a final solution to save the country from the financial crisis.

 
In my book, I talked about the future form of currency. I believe that the unified currency system will be created and the future currency should be beyond borders of nations. Due to the US dollar, problems in the US became contagious to the rest of the world. 

 The US's trade deficit is a structural problem. Trade deficit in America is inevitable.

If one specific country's currency is a measure of trade payment or exchange, the currency should go out of the country. Consequently, the trade deficit occurs.  

It is not easy to develop an economy under this kind of pressure with mounting debt.

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So, we adopt new currency system. I think gold- and carbon-related currency can be major tool. The gold is a commodity, so it will not be revaluated. It might worth it to consider making the right of carbon emission as a currency.
Every nation should put efforts on making new currencies, but I guess it'll be hard to get agreement from all nations.

There is a possibility to see a new currency from the association of several countries and trilateral competition among dollar, euro and new currency.

That’s because every country will eventually want to be out of the controls by the world’s central bank.

Today we see the financial crisis in Europe. It came from Greece and the cause of the crisis is "debt", as well. The trouble in Greece is very complicated and affected global stock markets.

The Europe Central Bank has already provided Greece with the third liquidity infusion. The ECB lent 600 billion dollars. Then its financial institution purchased short term national bond for a year, and afterward it purchased long term national bond for 10 years by keeping 1-year bond as collateral.

The yield for one-year bond and 10-year bond was 1 percent and 4 percent, respectively.
    
The national debt of Greece became serious. The credit-rating agencies lowered the ranking of Greece bond and financial institutions suffer from low premium.

At the end of 2008, similar situations happened in the Wall Street. Financial institutions in Europe said that they will purchase bonds in large quantities before July because the maturity date of the bond approaches.

Given the debt circumstance in European countries, you can notice the weakness of debt redemption across the European continent. Dominos will be inevitable.

In Eastern Europe, a ratio of short-term debts to GDP exceeded 35 percent. During the Asian Financial Crisis, the ratio of Thailand’s short-term debts to GDP was 35 percent. Currently, other European nations’ debt takes up 35 percent. If we look at Great Britain’s credit ratings on national bond, this would happen in the matter of time.
If another credit crunch emerges in other European countries by 2012, the impact will spread into the U.S. and Japan. 

The financial bailout policies that countries around the world have rolled out were troublesome. They should include sounder financial relief.

Changing debts into revenues in a balance sheet is meaningless. So far, financial bailout was nothing more than the government merely diverting its toxic assets. This is the largest error in the overall process. 

Financial bailout should have directed for preventing unemployment and creating more jobs, rather it only increased asset bubbles. Now the U.S.’s real estate market may find reinvigorating its market hard unless jobs are created.

Continuing econo쳌쳌쳌쳌