On the question of the U.S. trade deficit, Allen suggests that while some experts worry the trade deficit will cause a rise of protectionism in the U.S., he thinks the falling dollar may offset that tendency by strengthening U.S. exports. "Because the dollar has fallen so much, it's likely that won't be such an issue."
And while it may be too soon to speculate on how the presidential election could influence the markets, or whether Washington will impose new regulations, Allen says he would not be surprised to see new regulations if the subprime mortgage situation evolves into a broader banking crisis. He says there may be pressure to tighten control of the ratings agencies, which many believe failed to see the risks inherent in the securities based on risky home loans.
When China Sneezes...
According to Meyer, the Chinese economy will be one of the biggest factors to influence the financial markets and world economy this year. China's huge demand for oil, metals and other commodities has pushed commodity prices up around the world. But Chinese officials are now taking unprecedented steps to slow their economy to control inflation, Meyer says. That should stop the spike in commodity prices, but it also will likely cause a slowdown in growth worldwide in 2008.
"The price of pork went up 70% last year," he says. "That's a bellwether number....The average household in China is being squeezed." Historically, social unrest increases when the Chinese feel prices are too high, and incidents of unrest have risen dramatically in the past two years, Meyer says, adding that "the central government is adamant about restraining credit and, where they can, restraining prices, because the failure to do so creates social dynamite."
To stem inflation, Chinese officials have moved to tighten credit. Regional bank branches, which have long operated with great autonomy, are being put under stronger central control to assure that money is lent only to borrowers likely to pay it back. In addition, in a move meant to deflate the Chinese stock-market bubble, regulators have told Chinese mutual fund companies to stop buying Chinese stocks. "I can imagine that, informally, many other measures are being taken," Meyer notes.
The government, for example, is likely to stop subsidizing gasoline and diesel fuel. If prices for these fuels rise, demand will fall, helping to curtail the worldwide rise of oil prices. "It's inevitable that this will happen," Meyer says. "If you slow down the Chinese economy, you are going to slow down and reverse galloping petroleum and metal prices [worldwide]. I think we are coming close to the end of the commodity boom.... If this happens, people are going to be a little shaken, because the assumption has been that global growth will be driven by China and India." Meyer says he can't predict a recession in the U.S., "but I can see a slowdown in global growth because of the tightening in China."
He also contends that in the U.S. "greater taxation is inevitable," regardless of who becomes the new U.S. president, because Washington will have no choice but to tackle the federal budget deficit. "I doubt you'll see, for example, zero estate tax," he says, referring to the current law that will eliminate the estate tax in 2010.
As for his take on the credit crisis, Meyer predicts that uncertainty arising from the subprime mortgage collapse will continue to plague the financial markets. Currently, it is not possible to place a correct value on securities backed by mortgages and other forms of debt, such as corporate debt. Worries about this may continue to erode the balance sheets of banks and other financial institutions, he says, adding that there may be more bad news still to come.
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