World Economic Forum Still Rates A Collapse In Asset Prices As Its Highest Risk

The World Economic Forum has released its latest report “Global Risks 2010: A Global Risk Network Report.” The WEF still rates a collapse in asset prices as its highest risk to the global economy. Specifically, the report assigns a greater than 20% chance of an asset price collapse costing over $1 trillion (graphic on page 3). If central bankers around the world believe this assessment, they are very likely to keep interest rates low for some time to come!

The 2010 report did not focus on asset prices since it was covered in depth in the 2008 report. Here is what the 2010 report has to say:

“The last edition of this report discussed the longer term implications of the financial crisis, exploring the tight interconnections among economic and resource related risks. The fact that the risk of an asset price collapse remains the strongest risk on the landscape on the severity and likelihood axes illustrates the continuing uncertainty about the resilience of the global economy and the effectiveness of fiscal and monetary responses, governance and regulation. Concerns abound about the decline in the dollar and low interest rates fuelling another bubble, this time liquidity rather than debt-driven. Experts are also worried about a lag in the impact of the recession in a number of areas. The level of corporate bankruptcies, particularly among small and medium size enterprises remains high. Credit card default rates, which are highly correlated with unemployment, are already at historic levels. The current unemployment rate of more than 10% in the US is considerably higher than the 6.5% unemployment rate that most credit card lending models assume. Finally, though residential house prices have fallen considerably in those markets considered to have been the most overheated, concerns persist about commercial real estate. As
illustrated by the events in Dubai in December 2009, debt loads remain high; as refinancing needs arise, which are only expected to peak between 2011 and 2013, further shocks could emerge.”

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