David Einhorn says the global economy is in a period between crisis. He thinks that we’re sort of in a respite period where things for the moment seem relatively stable, but there’s still a lot of unfinished business that will come from the last crisis and cause another global crisis.
Cofounder and president of nearly $7 Billion Greenlight Capital, Einhorn was Charlie Rose’s guest last week and predicted a crisis, similar to the 2008-2009 recession, that will be triggered by the problems in the public sector. This is what he said:
“I think what we did in the last crisis in resolving it was rather than go to the root of the crisis, tally up the damage, allot the losses, clean up, fix things, and move on, I feel like a lot of what we did was sort of sweep things under the rug and put short-term bandage fixes on things. And I think we managed to transfer a lot of the problems sort of from the private sector to the public sector. The problem is that it’s such a large problem that eventually, I’m concerned that will eventually threaten the public sector as well.
…what we decided to do was sort of paper over the problems. We bailed out a lot of institutions. We bailed out a lot of people that had positioned themselves incorrectly — ostensibly incorrectly in the crisis, whether it was individuals, whether it was institutions, whether it’s investors and so forth.
And because we weren’t willing to go through that, we haven’t been able to effectively clean up that mess, and it’s created a very, very large budget deficit. And it’s created a monetary policy that is extremely easy, and it seems to be perpetuating itself into a way that I think is going to eventually come to a tough spot.”
There you have it. Another great recession, this time caused by countries bankrupting because of huge budget deficits. David Einhorn has been investing in gold for the past two years and he’s been betting that interest rates will rise dramatically (especially in Japan). If Roubini was warning us about this crisis, we wouldn’t be worried. It’s a different story when a credible hedge fund manager like David Einhorn is pessimistic about the world economy.