Global Economy - About to Burst?

“The most important Republican for those of us in the financial world is Ron Paul.” So says John Taylor, chief investment officer of FX Concepts, “the world’s largest currency hedge fund.”

More specifically,

“Although we have heard much from this group about spending cuts, the most important Republican for those of us in the financial world is Ron Paul, who heads the committee that oversees the Fed. His extremely restrictive view of permissible Fed activities will make it extremely unlikely that a QE3 or another innovative program will be in the wings when QE2 expires in June."

This, he says, means that  “if the US economy does slow in the second half of the year, the Fed is unlikely to come to the rescue – interest rates are almost at zero and expanded fiscal spending looks unlikely.  This will be the worst pre-recession position the US has ever experienced.  If a recession does start it will intensify unchecked as the authorities’ hands are tied." 

At the same time, he argues, escalating tensions in the Middle East pose an intolerable threat to the global economy.

“The world economy faces a problem of Gordian proportions, as it both cannot tolerate more US liquidity and it cannot live without it.

“The Middle East crises have accelerated the endgame as it has both pushed prices higher and caused a shift to risk aversion, which is basically a need for more dollar liquidity.”

As a result, he warns that  “markets could be starting their next major move lower at this time."