Is Soros right?

Could the world see a repeat of 2008 in 2016?

Speaking at a conference in Colombo, George Soros raised a storm by comparing the global economic situation in 2016 to the crisis of 2008. According to Soros, China could be the key factor and a slowdown in China could result in devaluation of the Yuan. This will force most other emerging markets to devalue their currency to stay competitive. This contagion of currency battles coupled with US tightness could result in a crisis like 2008. How likely it is that year 2016 could see another Black Swan event like 2008?

There surely are similarities…

 Soros is right that there are some stark similarities between 2008 and 2016. For starters, we saw an asset bubble in 2008 that was driven by easy availability of liquidity. In 2016, the asset bubble has been largely driven by liquidity driven by the central banks. Back in 2008, the most powerful growth engine of the world, the US was the actual fountainhead of all the economic ills. In 2016, it is China that is the fountainhead of all the economic ills. Remember, today China accounts for 50% of annual accretion to world GDP. Back in 2008 an integrated global market ensured that the contagion effect of the crisis was very strong. This led to the crisis spreading across the world. Year 2016 is no different. The financial market linkages are anyways there. Additionally, China has created a web of intricate trade linkages that is likely to lead to contagion across financial markets, economies, global banks and world currencies.

But there are also differences…

What is encouraging is that there are also some stark differences between 2008 and 2016. The year 2008 saw the collapse of the sub-prime fiasco which had enveloped everything from banks, to housing finance companies, to insurances, to economies to sovereign funds to securitizing companies like Freddie Mac and Fannie Mae. Nothing of that magnitude seems to afflict the global financial institutions this time around. Of course there is the $9 trillion of dollar debt that the world owes, but that can always be managed as it purely boils down to the value of the dollar.

A very important difference is that a series of crises in the last few years like the Lehman crisis, the Greek crisis and the PIGS debt crisis has resulted in institutional mechanisms getting strengthened. That is likely to hold the markets in good stead. Secondly, China is slowing consciously as it shifts from an investment driven economy to a consumption driven economy. As long as China can manage its shadow credit system, there is nothing serious to worry about. China’s fall in growth is more due to the size effect. Economies the world over are too interdependent on each other. The world economy in 2016 cannot afford another crisis! ©

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