Inflation might become next global crisis
2011-02-02 17:58:20
Inflation might just become the next crisis to hit the globe, according to UBS Investment Bank's senior economic advisor, George Magnus.
He had also correctly predicted that the sub-prime crisis would lead to a recession.
Prices for household items like food continue to go up today.
If inflation rises further with no solution in sight, some believe it could lead to a new crisis which will cripple the world economy.
Experts do not believe the world will see another banking crisis in the near future. They add that the economic restructuring in the West will go on for 10 to 15 years.
That will mean that Western countries will have to save more, while Asian countries like China will save less. So the key question is, how will China rebalance its economy to meet new challenges like inflation? Some analysts said that China simply not doing enough for now.
Mr Magnus said: "The genie is out of the bottle, which is the inflation genie. And putting it back in again is going to be in my opinion, one of the biggest policy challenges. The emphasis so far at least has continuously been on incremental change, gradual shifts, anything that kind of does not rock the boat.
"So disruptive change, which is often what real change is all about, is looked at in China with great caution and concern...small changes in the value of the RMB, very very modest changes in the levels of the interest rates. But I think it is a question of how far these changes will be pursued and how quickly. And in the meantime, I think that the danger is that China remains too firmly on a path which might not be in its long run interest. It might create too much of an asset bubble, in property, in inflation."
Mr Magnus believes that China needs to take bigger and bolder risks like appreciating its currency and liberalising its low interest rates.
However, some economists disagree that China is not doing enough.
Leong Wai Ho, senior regional economist at Barclays Capital, said: "I think 'crisis' - in so far as inflation is concerned - might be a strong word. I think inflation is under control in China. While we are seeing levels that are relatively elevated, food prices, I suspect, will start to come off in the next few months.
"We are probably past the peak in terms of where food prices are. It has obviously gone beyond merely increasing interest rates, for example. It has tightened quantitative controls, it has rationed credit more severely by getting banks to tighten up their lending standards. And through this set of measures, they have tightened up liquidity flowing through the economy significantly, so this credit control measures will then be felt on inflation in the next 1-3 months."
But there is no doubt that inflation is keeping many world leaders on their toes, as it could lead to trade protectionism and social unrest.