Dubai: The world economy is nowhere near to achieving stability, but could face more violent business cycles, largely resulting from government intervention in financial markets, said Marc Faber, the Editor of Gloom, Doom and Boom Report.
"So far, governments in the developed world have been addressing long-term structural economic problems such as low economic growth and persistent unemployment with short term fixes, largely through big doses of liquidity," said Faber at the Middle East Investment Summit on Tuesday.
In the last two decades central banks have been using a cheap money policy to boost economies when faced with the threat of a slowdown. Although asset bubbles and inflation are the ultimate consequences of money printing, its impact on nations and various income strata will differ, Faber said. The influx of massive doses of liquidity means negative real interest rates and negative gains for savers.
While Keynesian economists have been advocating government intervention and stimulation through liquidity, economists like Faber are warning that the consequences will manifest themselves in huge volatility.
"The politicians love to print money, as it is off-budget, off-balance sheet and most importantly off-accountability. The central banks are effectively performing the dirty job of crisis management in stealth mode," Steen Jakobsen, chief economist of Saxo Bank, said.
The boost in asset prices resulting from new liquidity will benefit the rich, mostly asset owners and speculators, while lower income groups will be the hardest hit.
The debasing of currencies along with high unemployment will result in rising social tensions, political turmoil and revolutions, like those witnessed by the Middle East and North Africa over the last year.
Faber said the political and economic tensions in the Middle East are far from over, and the region could face more turmoil on a much larger scale, resulting in disruptions of oil supplies from the region.
While the US and European economies are destined to suffer low growth, high unemployment and eventual high inflation for a long period, the high growth Asian economies like India and China are likely to slow down.
"Everyone is talking about a soft landing of China through a managed deflating of the bubble. If there are signs of a crash, we can almost certainly expect a massive liquidity infusion into the economy," said Faber.
