World Economic News
Top Bond Trader: World Economy on the Ropes
The world economy is in the worst shape it's been in 20 or 30 years, worried Bill Gross, head of Pimco, the largest bond trading fund in the world. In an interview with London's June 17 Financial Times, Gross notes: "Too much debt, geopolitical risk and several bubbles have created a very unstable environment which can turn any minute. More than any point in the past 20 or 30 years, there's potential for a reversal." "We have become a leveraged global economy, specifically in Japan and the U.S. With all this consumer debt, business debt, government debt, smaller movements in interest rates have a magnified effect ... a small movement can tip the boat."
Gross then pointed to various specific bubbles such as commodities, the British housing market, and the U.S. currency. "The U.S. dollar is being supported by the kindness of strangersJapan and China. It should be 20 per cent lower than it is. Japan and China will change their stance, we don't know when, but we know they will."
The threat of economic instability, he said, stemmed in part from "the advent of financial alchemy"in particular, the growing use of hedge funds. "Even banks are employing the carry tradeborrowing short and lending long. They're doing things they haven't done before. There's lots of risk in the economy now compared with even five years ago.... They are amazingly similar in the leverage they use, and have the same structure, borrowing at 1 per cent and lending or investing longer, and they take it to an extreme because they go into stocks, commodities, real estate. If banks are regulated, hedge funds should be. I think there's a lot of risk here", he said, citing the 1998 collapse of Long-Term Capital Management.
Underfunded UK Transport System Threatens Economy
Congestion in the British transport system will cause "serious" damage to the economy unless there is at least 252 billion pounds' worth of investment over the next 10 years, said the Confederation of British Industry in a warning to the government June 14. This much investment would only put British transport on a "middling" level compared with the rest of Europe. The Labour government's transport plan, begun four years ago, has been a failure, the CBI said. CBI director-general Digby Jones reported that, despite the spending of 50 billion pounds in the last four years, the lack of improvement in road congestion or train performance was "exhausting tolerance."
"We have a first-rate economy which deserves a first-rate transport system, not the substandard infrastructure that is letting down the country," Jones said. "The government cannot make any more mistakes, nor permit more delay, in delivering the transformation we need."
Currently, spending on roads is just half what it was, in real terms, 25 years ago, says the CBI, and, per capita, below the European average.
The CBI calls for a new 10-year program, to widen highways, upgrading the East Coast, Great Western and London-Brighton main rail lines, and building delayed projects such as Crossrail rail tunnel in London.
The government's own 10-year program, had called for 180 billion pounds' investment, 60 billion pounds of it from the private sector. This was to have let Britain's transport network "rival Europe's best" by 2010, the government claimed. But all the road work is years behind schedule; almost all the planned rail upgrades were shelved indefinitely, because the budget increases have gone to expanding maintenance costs.
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