It's been almost three years since the financial crisis struck the globe. However, if a few experts are to be believed, we don't seem to be over the hump yet. Not by a long shot.
One of those experts is George Soros, arguably the most successful big picture guys moving around if not the most foresighted. But what he seems to be saying these days does look like a correct diagnosis to us.
'We aren't out of the woods at all', Soros said in a recent conference. Leaders have kept markets up with 'artificial life support' without dealing with the imbalances as per him.
We completely agree. The excesses of the financial crisis have not been allowed to die down completely. Instead, they have been propped up massively in an attempt to bring the economy back on the recovery track.
However, this isn't how things work. In order for there to be a healthy recovery, the previous malinvestments have to be completely eliminated. And things have to start afresh. But that has not been the case. What has happened instead is transfer of liabilities. The debt has moved from private hands into the hands of the taxpayer. The outcome being whatever recovery has happened has turned out to be a phony one. It has been driven completely by stimuli and once the stimuli are taken away, there is a real risk that the US economy could go back into recession.
Soros also had a word of caution for the Chinese economy. He argued that the Chinese formula for steering the economy was running out of steam. He believed that the dragon nation missed its opportunity to stem inflation and may now risk a hard landing.
Even here, Soros couldn't be more on the ball. China has no doubt continued to grow at an exhilarating pace even after the crisis struck. But it should be noted that just like the US, even China's growth has been largely stimulus driven. Infact, in order to prevent its growth rate from falling sharply in the aftermath of the crisis, it is believed to have unleashed the biggest economic stimulus in the world. And this played a huge role in the country's economic growth. But now the reality seems to have caught up with the Chinese economy. The chickens of overinvestment during the boom phase seem to be coming home to roost. There seems to be an overcapacity at a lot of places and unless there is adequate demand, a great number of loans will go bad, hurting the future growth prospects of the economy.
Thus, with the economic future of both the US as well as China increasingly at risk, it is very apt for Soros to say that we are not out of the woods at all.