The global economy is heading toward another double-dip

By Andy Xie

The global economy is heading toward another double-dip scare, possibly in the third quarter, in what could be a repeat of summer 2010.

Financial markets may stumble in a few months, and that could prompt the U.S. Federal Reserve to introduce a third round of quantitative easing or an equivalent, which would be another step down the path toward stagflation. In this scenario, China's current monetary tightening policy would be difficult to sustain.

A decline for the U.S. property market is accelerating. It could fall another 20 percent over the next 12 months.

These factors contributing to a double-dip scare may push the U.S. Federal Reserve to launch another round of stimulus, although it may not be called QE 3. At the same time, the scare may cause oil prices to dip, easing inflation concerns.

The main aim of a QE 3 would be the same as QE 2 – to support U.S. stock and property markets. While it may succeed in reviving these asset markets, it would also yield surging oil prices and inflation.

A real double dip would occur if either the U.S. Treasury bond market crashes or appreciation expectations for China's currency reverse on expectations of depreciation. The timing for this scenario could be fourth quarter 2012, possibly after the U.S. presidential election and Chinese Communist Party's 18th Congress.

Loose monetary policy is the cause of inflation, and its intended purpose is to stimulate growth. But when such policy is sustained despite inflation, it signals deeper problems. When stimulus fails to revive growth, it suggests structural problems.

In today's world, deep structural problems are impeding economic growth. But most governments don't have the political will or power to deal with them. Instead, they pursue easy solutions such as printing money, which leads to stagflation.

But the U.S. government is trying to simulate the demand side to solve a supply-side problem. That doesn't resolve the problem but instead creates a new one – inflation. No amount of monetary stimulus by the Fed can bring high growth back to the United States, in my view.


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