Desmond Lachman: Fault Lines in the Global Economy

We can add Desmond Lachman to the list of those concerned about how the US Fed handles interest rates as we head into 2016. As we have noted here on the blog, the US Fed is really out on a limb on this and in position to be a potential scapegoat if things go bad either in the US or globally (or both). Below are some quotes from this article by Desmond Lachman on the American Enterprise Institute web site.

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"Global economic policymakers should approach 2016 with more than the usual degree of caution. Not only do there appear to be an unusually large number of identifiable fault lines in the global economy, but those fault lines also appear to be both interconnected and of systemic consequence. This is all too likely to result in yet further slowing in the global economic recovery next year that would argue against any premature additional tightening in Federal Reserve interest rate policy."

. . . . . .

"A further strengthening of the U.S. dollar (my added note - this is a by product of the Fed raising rates) is likely to highly complicate China’s efforts to rebalance its distorted economy from one which relies excessively on investment and export-led growth to one that has domestic consumption play a larger role. This is especially the case since it is occurring at a time when China’s economy is already slowing and there has been more than S$800 billion in Chinese capital outflows over the past year. It is also occurring at a time when the Chinese economy is characterized by massive excessive manufacturing capacity as well as by over-investment in its property sector."

. . . . . 

"At the same time, a strengthening of the U.S. dollar and a return of capital flows to the United States is bound to exert considerable pressure on emerging market corporates. According to the Bank for International Settlements, since 2009, those corporates have increased their U.S. dollar-denominated borrowing by more than $3.25 trillion. This has to be a major threat to the global financial system, since it must be only a matter of time before these corporates start defaulting on these loans."

Click here to read the full article by Desmond Lachman

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My added comments: Please not how vulnerable the US Fed is here is things go south. Everyone will blame them for raising interest rates too soon including both US political parties, the IMF, the BIS and and majority of well known economic analysts. Again, expect the Fed to do just about anything in its power to avoid this if possible.

If things do go south and the Fed does become the scapegoat, we then need to watch for Jim Rickard's prediction that the IMF will try and step forward in a more prominent role using the SDR.