338 lines
12 KiB
Plaintext
Executable File
338 lines
12 KiB
Plaintext
Executable File
finance
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comment
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ambroseevans_pritchard
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8230654
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-----
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# Overheating East to falter before the bankrupt West recovers
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## From the overheating East to a troubled West, Ambrose Evans-Pritchard
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offers his predictions on the global economy next year.
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![From the overheating East to a troubled West, Ambrose Evans-Pritchard offers
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his predictions on the global economy next year.][1]
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[![Ambrose Evans-Pritchard][2]][3]
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By [Ambrose Evans-Pritchard][4] 4:30PM GMT 03 Jan 2011
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[Comments][5]
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This bear is not for turning. It would be joyous indeed if a fresh cycle of
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global growth were safely underway, but I don't believe it. Sorry.
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Policy levers in the US, Europe, and Japan remain set on uber-stimulus with
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the fiscal pedal pressed to the floor and rates near zero everywhere, yet OECD
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industrial output has not regained the peaks of 2007-2008 by a wide margin.
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Leading indicators are tipping over again. We are one shock away from a
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liquidity trap.
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The East-West trade and capital imbalances that lay behind the Great Recession
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are as toxic as ever. Surplus states are still exporting excess capacity with
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rigged currencies -- the yuan-dollar peg for China and, more subtly, the D
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-Mark-Latin peg within EMU for Germany.
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Dangerously high budget deficits of 6pc, 8pc, or 10pc of GDP in countries with
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dangerously high public debts near 100pc may have prevented an acute
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depression, but they have not prevented the weakest rebound since World War
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Two, and they cannot continue, whatever the assurances of New Keynesians and
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pied pipers of debt.
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Cyclical bulls may see the surge in 10-year US Treasuries -- and therefore
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mortgages rates -- as a sign that growth is about to blast off: structural
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bears suspect it may be the first convulsive shudder of bond vigilantes
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dismayed at the easy willingness of Washington to spend $1.4 trillion above
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revenues next year, with no credible plan to contain the monster thereafter.
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## Related Articles
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* [Record spike in EMU default risk][6]
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24 Dec 2010
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* [Citigroup fears wave of eurozone defaults][7]
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22 Dec 2010
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* [Self-righteous Germany must accept a euro-debt union or leave EMU][8]
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19 Dec 2010
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* [The eurozone is in bad need of an undertaker][9]
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12 Dec 2010
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* [China's credit bubble on borrowed time as inflation bites][10]
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05 Dec 2010
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* [Germany faces awful choice as Spain wobbles][11]
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29 Nov 2010
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Can bond yields rise on "sovereign risk" even as core prices grind lower
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towards deflation? Yes, they can, and this baleful possibility is not in the
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textbooks.
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Ben Bernanke made a fatal error by launching QE2 too early, with an incoherent
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justification, by dribs and drabs for fine-tuning purposes. The QE card cannot
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easily be played a third time. If he now tries to print money on a nuclear
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scale to crush all resistance and hold down Treasury yields, he risks
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exhausting Chinese patience and invites the wrath the Tea Party Congress.
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Alas, my neck-sticking predictions for 2011 must be as grim as ever. This does
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not exclude further bear rallies over the Spring on Wall Street and Euro-
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bourses as institutional mammoths seek to extract themselves from bonds.
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Europe's insurers have as little as 5pc of assets in stocks, against 15pc or
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more in the 1990s. Yet it is a double-edged sword if big funds switch en masse
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into shares. Bond dumping has economic consequences.
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Japan will slip back into technical recession. It cannot keep raiding its
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foreign reserve fund to pay bills. Public debt will spiral up to 235pc of GDP.
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Interest payments will approach 30pc of tax revenues. Fresh debt issuance will
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outstrip fresh private savings this year. Dagong, Fitch, and S&P will have to
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act. Downgrades will come thick and fast. This time they will hurt.
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Yes, I thought Japanese bonds would buckle in 2010. The obsolete paradigm
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survived another year. The longer it takes, the worse it will be.
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China and India are over-heating, faced with a 1970s choice between choking
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credit or the onset of stagflation. If they choose the latter to buy time, the
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politics of food will turn on them with a vengeance.
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Vietnam will have to rescue its banking system, kicking off the Asian hard-
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landing of 2011-2012. The Aussie dollar will come back to earth.
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Dylan Grice's rule of thumb at SocGen is that regions coming off a "good
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crisis" -- Japan in 1987, the US during East Asia's 1998 blow-up, Chindia this
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time -- typically pop about two and half years later. The reason they have a
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good crisis when others bleed is because momentum from credit follies and/or
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hubris overpowers the external shock, but that contains the seeds of its own
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destruction.
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Speaking of rules, the Atlanta Fed's law is that every year of debt-based boom
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is roughly offset by equal years of debt-purge bust, which means a Lost Decade
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for the old world. I doubt the West will recover soon enough to pick up the
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growth baton before the East hits tires. We may then have a "sub-optimal
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equilbrium", that modern euphemism for a trade depression.
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Europe is hobbled by its Delors Error. The region makes things that world
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wants to buy. Its external accounts are in balance. Fiscal policy is more
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responsible than in Japan, America, or Britain, yet the whole is less than the
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parts. A dysfunctional currency union engenders chronic crisis at a lower
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threshold of aggregate debt.
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Frazzled investors will seize on China's foray into Iberian debt markets to
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thin their own holdings, denying the Portugal and Spain much interest relief.
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Lisbon may last unit on until March before being forced by yields above 7pc to
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accept its debt servitude package. At that point the EU will order its €440bn
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rescue fund to buy Spanish debt pre-emptively, hoping to draw a final line in
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the shifting sand, with half-hearted solidarity from the European Central
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Bank.
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As usual, Frankfurt will fall between two stools, failing either to satisfy
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Germany by immolating EMU on an altar of Bundesbank purity, or to satisfy
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everybody else by blitzing QE to save the system.
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Bond yields will not fall enough to stop to the vice from tightening in every
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EMU state south of Flanders. It will become clear that Europe's scorched-earth
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rescues cannot work because they offer no means by which victims can clear
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debt and claw their way back to health.
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Ireland's Fine Gael-Labour coalition will take its revenge on Europe for
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imposing such ruinous terms under Berlin's Diktat. It will restructure senior
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bank debt, setting an irresistible precedent for the PASOK backbenchers in
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Greece, the Left wing of the Partido Socialista Obrero Espanol, and America's
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insolvent cities. From bank debt to parastatal debt is a hop, and from there
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to quasi-sovereign debt is a skip. Nobody will utter the word default. They
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never do. Bondholders `volunteer'.
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Pudding bowl haircuts will set off the next wave of distress for Europe's
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banks as they try to refinance $1 trillion by 2012, in competition with hungry
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sovereigns. Gold may slip at first as casino funds cut leverage to meet margin
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calls, before punching higher to €1300 an ounce as investors seek gold bars in
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a precautionary move. Talk of capital controls will grow louder.
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Year III of the Long Slump is when we confront the Primat der Politik in tooth
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and claw, the phase when states become erratic, victims fight back, and
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dissident intellectuals start to inflict damage on failed orthodoxies. The dog
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that hasn't barked yet is the jobless army in Spain, the 43pc of youths
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without work. Bark it will when the €420 dole extension expires in February.
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The cruelty of Europe's `internal devaluations' will become clearer. Wage cuts
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are tectonic events. They set off the protests that forced Britain and then
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France off the Gold Standard in the 1930s, and smashed Argentina's dollar peg
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a decade ago. What we need is an iTraxx European Wage Index to navigate EMU's
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treacherous waters from now on. Spain's Jose Luis Zapatero has barely begun to
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cut, yet he has already had to impose the first state of emergency since
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Franco to keep airports open.
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Certainly, this is the year when Europe's unions will remember their own
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warnings twenty years ago that EMU was a "bankers' ramp", a scheme for the
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convenience of elites. They will ask louder why crucifixion on a Deutschmark
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cross is in their interests.
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Those few and reviled Iberian economists who dare to suggest that monetary
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union itself is the reason why Spain and Portugal cannot take action to fight
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the slump, will find a voice in the press at last. Once debate is engaged, it
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will be impossible to contain.
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It would be a mercy if the German constitutional court brought this
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unhappiness to a swift close by ruling in February that Europe's rescue
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machinery is a breach of EU treaty law, and therefore of the Grundgesetz. But
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it cannot happen, can it? A court order forcing Berlin to suspend payments
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would drive a stake through the heart of German foreign policy, and for that
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reason the eight judges must recoil, and the law be damned. One presumes.
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Alas, there may be no neat solution, no division into two currency blocs with
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the South keeping the euro and the North launching the euro-plus, no brave
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decision by Germany to get out, revalue, and let others recover. Instead,
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there will be month after month of catfights, and flashes of hatred.
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The EU will do just enough to prop up the edifice, but too little to restore
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lasting confidence. The German bloc will not confront the elemental point that
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either they agree to pay subsidies - not loans - on a scale equal to
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Versailles reparations, for year after year, or the South with stay trapped in
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slump until electorates blow a fuse.
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Norway will sail on serenely.
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Happy New Year.
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[What are these?][13]
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* Share: [Share][12] [ ][14] [ ][15]
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[Tweet][16]
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http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8230654
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/Overheating-East-to-falter-before-the-bankrupt-West-recovers.html
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Telegraph
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## [Ambrose Evans-Pritchard][3]
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* ### [Europe »][17]
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* ### [Finance »][18]
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* ### [Economics »][19]
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* ### [Financial Crisis »][20]
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* ### [Business Latest News »][21]
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In finance
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[![A protester stands opened armed in front of the military in Pearl Square in
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Bahraini capital Manama][22] ][23]
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### [Energy crunch as nuclear and oil both go wrong][23]
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[![Will 'Chindia' rule the world in 2050, or America after all?][24] ][25]
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### [Will 'Chindia' rule the world in 2050, or America after all?][25]
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[![From the overheating East to a troubled West, Ambrose Evans-Pritchard
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offers his predictions on the global economy next year.][26] ][27]
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### [Predictions for 2011: Overheating East to falter][27]
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[X][12] Share & bookmark
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[What are these?][13]
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Share:
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* [ ][12]
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* [ ][14]
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* [ ][15]
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* [Tweet][16]
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* Advertisement
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![][28]
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