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Last Updated on: 18th February 2019, 03:54 pm
While governments are out busily touting the success of the global economy, economists are singing a different tune. This past week, renowned Nobel prize winning economist Paul Krugman was speaking at the Dubai-based World Government Summit. Here he shared his heartfelt opinion that a recession will overtake the world economy this very year in 2019.
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Contrary to Government Optimism, Krugman Sees Imminent Global Recession in the Near Future
Many market players have become more and more concerned about the likelihood of a significant and painful economic downturn in the next few months. The United States versus China trade war is only one concern overhanging international markets and damaging both consumer and business sentiments anymore.
Now Nobel Prize winner (for economics) Paul Krugman has given voice to their nagging concerns this past weekend by declaring that the world's economy is marching towards a year 2019 recession. The majority of economists agree (and a number of global business leaders as well) with him that global economic growth is rapidly decelerating. Policymakers naturally continue to cling to vain hope that they will manage to pull off a so-called soft landing as opposed to an actual recession.
Yet Krugman was highly skeptical of the rosier scenario promoted by government spokesmen. When participants asked him if investors should anticipate a recession over the upcoming months, he told them:
“I think that there is a quite good chance that we will have a recession late this year (or) next year.”
Krugman's voice casts a long shadow for his impressive resume in the competitive world of economics. He is the Princeton University Economics Professor Emeritus at their prestigious Woodrow Wilson School. Krugman attained the Nobel Prize in economics back in 2008 for work he did on explaining international trade patterns and economic geography. When he speaks, people listen carefully.
What Would Be Leading Causes of Such A Global Recession This Year?
Krugman had more to say on the subject of what could actually cause such an economic setback for the world as a whole. He declared that it was less than likely that a single “one big thing” would cause the economic pullback. Rather, he fears a variety of economic headwinds are boosting the chances of a global slowdown.
The award winning economist mentioned one cause of concern in U.S. President Donald Trump's tax cutting stimulus. He called the economic stimulus program “not very effective.” Where high tech growth is concerned, Krugman issued a warning that it is “starting to look like the bubble may be deflating.”
Krugman is especially concerned about what he calls a serious lack of preparation among the important economic policymakers at the central banks and in government. He shared his main area of worry with:
“The main concern has always been that we don't have an effective response if stuff slows down. The place that looks really close to recession right now is the euro area.”
European Commission Downgrades Economic Forecasts for the EZ Block 2019-2020
It was not an unrelated coincidence that just at the end of this past week, the European Commission had severely downgraded its own economic growth forecast for years 2019 and 2020 euro zone economic growth. The EC stated that its own euro zone economic growth will decrease to 1.3 percent in 2019 versus the 1.9 percent back in 2018. For 2020, they anticipate it rebounding somewhat to 1.6 percent.
These revised estimates proved to be significantly less promising than the last forecast of the EU executive arm released only back in November. At that time, the Brussels' bureaucrats were looking for a growth rate of 1.9 percent in 2019 and 1.7 percent for 2020 in the single currency block of 19 nations. These latest revised estimates out of Europe only stirred worries that the worldwide economic slowdown has already gathered steam and spread to Europe.
Paul Krugman would not comment on the significance and likelihood of a European-wide slowdown. He stated humbly:
“By the way, my track record for this is bad — as is everybody's. No one is good at calling these turning points.”
Italy's Solution for A Hopelessly Imbalanced Budget is To Sell Gold Reserves
When the consensus is for a significant economic slowdown, and your national government finances look most bleak, one solution is to take your only real hard currency and most valuable asset, your national gold reserves, and pawn them on international markets to finance your governmental spending spree. At least this appears to be Italy's new strategy for financing their campaign promises and pet projects.
Italy has a so-called ace in the hole economically. They remain the third biggest national holder of gold reserves on the planet, only trailing the U.S. and Germany. Italy's 2,451.8 tons worth of gold they held as of 2018 is a massive economic asset that has helped to steady the country through a twin growing government debt crisis and a systemic banking crisis over the last two decades. This chart below shows the growth in Italian Debt to GDP:
Yet now politicians in Italy have at last considered tapping into the country's national wealth reserves to shore up their annual government spending plans. The country's Deputy Prime Minister Matteo Salvini stated a week ago that utilizing the Italian gold reserves in order to plug up holes in the budget may be an “interesting idea.” Already media reports had come forward showing that the government was contemplating this kind of a significant move.
It was Italian national newspaper La Stampa that revealed the national government is apparently considering spending part of the country's gold reserves at the Bank of Italy to help compensate for the 2019 budget deficit they anticipate. It would also enable the government to avoid having to enact an unpopular VAT increase planned for 2020. Salvini answered reporters who asked him about this possibility:
“It's not an issue that I am following, but it could be an interesting idea.”
Interestingly enough, this would not be the first effort by an Italian government to siphon off from the gold reserves or sell some of them in order to re-balance the government's accounts. In the past, the European watchdogs intervened to prevent such a move as they stated that it would break public financing rules and undermine the critical independence of the Bank of Italy.
Such talk did resurface when the leaders of the two main parties comprising the country's ruling coalition contemplated the idea of deploying some of the national gold reserves managed by the central bank. The parties had promised to sack the head officials over at the Bank of Italy for not intervening to stop the country's ongoing string of national and regional bank failures over the past years.
Gold Will Carry You Through the Next Global Financial Crisis or Great Recession
The idea of a global recession returning is nothing to shrug off. The last such recession (the Global Financial Crisis of 2008-2009) nearly destroyed the world banking system and international economy. It caused more pain than any prior economic downturn since the Great Depression and became ominously known as the Great Recession. Some economists fear that the next economic catastrophe will be even worse.
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