China recently lowered its key interest rates to fight an economic slowdown. In the United States, a third round of quantitative easing might be launched anytime soon. As to Europe, a debt problem has emerged in Spain, following behind Greece.
These developments remind us of a prediction by economist Nouriel Roubini about a "perfect storm" of global economic weakness, likely to come in 2013.
The current woes facing the global economy can be traced to the 2008 global financial crisis. The problem was triggered by the U.S. subprime mortgage crisis -- the result of a housing bubble caused by excessive leverage. To put it simply, over leveraging creates a big bubble, and the bursting of the bubble triggers a crisis, which leads to other crises.
Many countries around the world have adopted expansionary measures in an effort to deal with the problems, but these moves may create new bubbles. They serve only to delay the worsening of the problems but do not provide any fundamental solutions.
The ultimate issue underlying the crisis is insufficient demand. While demand creation is the core of economic policy in the 20th century, this policy tends to create short-term demand at the expense of long-term demand.
We wonder if people would learn some lessons after the storm is over. (Editorial abstract -- June 15, 2012)
(By Y.F. Low)