Global Economic Tsunami 1st wave hit shore!

In 2008, I hoped that the global economic pain could be over in 3 years, but then I was too optimistic. As the tectonic plates of finance dislocate, it caused a tsunamic effect on the economies of the world.

The instinctive US response to the financial dislocation has constantly been a party politics above national interests, followed by pork barrel fiscal approach which is turning out to be worse than expected. The global banks are now damaged structurally, causing the lending crush of 2009.

By now, nobody would deny that we have been hit by the tsunami’s first wave of economic contraction. Interestingly, we hear about it (some major banks and companies are in crisis), but our feet just get wet (no pay increase or bonus and, some friends have lost their jobs). It doesn't seem to be that bad, just like its first wave.

With governments' massive injections, the tide will roll so far back that it will appear eerily serene and you will feel so unreal when global economy will seem to be recovering well, after the fiscal stimulus is being felt towards the end of the year, Y09. Economies will seem to be recovering, especially the Asian economies. Many banks' analysts will proclaim that the global economy recovery is firmly in place. The world will start to let their guard down. Don’t believe them!

Be forewarned, inflation will then be back, but note that this time round, it is only consumers' inflation and not asset inflation. The follow-up massive Tsunami killer wave will hit shore somewhere between Q1 to Q2 of 2010 with its hyperinflation which will be followed by economic stagnation, also known as stagflation.

Hyperinflation is caused by the massive money printing of US that will spill over to the rest of the world, forcing some governments to do the same, in order to maintain their competitive currencies at low level. Stagnation is caused by then dislocated economic activities and the loss of confidence. In layman terms, consumer prices will climb steadily, killing off global demands for goods while high interest rates will kill off investments too. By now, the big retrenchment or job cuts will be across the board (no longer just the banks or in another words, your family members or yourself are losing jobs too).

The destruction of assets in Y08 will be followed by destruction of jobs in Y09 and Y10. The world's economy will be dragged through a period of deep recessions, not too far from the depression scenario. Strikes and riots will be common scenes on television, in the lands of the once rich countries.

There will be significant impact on most sectors and on all financial instruments; currencies, bonds, shares, commodities and other asset classes, in particular, the property market. I will sketch out the impacts in my subsequent articles.

Fortunately, we live in Asia, and as such, Asia will be the least painful of the three major centres, more for Europe and worst for USA and UK too. After 1998 financial crisis, Asian countries generally have lived within their means, maintaining trade and current account surpluses and their exposure to the US toxic loans are limited.

When will global growth return? Again, I choose to be an optimist that mankind has learned some lessons from the past, that is politicians do not use wars to stay in power at all costs. Instead, they will choose to be the enlightened leaders that carry out painful reform to their economies for growth. In truth, I am more confident of the fact that the multi-polar big players are militarily not too far from one another to wage wars with major players among themselves.

The key players that can revive the global economies are China, US and Europe. China needs to divert exports to domestic consumption, while US needs the reverse. Europe needs to maintain a fair balance of both. In short, Asia should be happy to see some soft economic growth in 2011 while US may have to work out their reforms over a longer period before soft growth returns in 2013, and Europe is somewhere in between.