We live in an unbalanced economic world that at some point will need to correct its self. #ltggoldrockreviews

LTG GoldRock Senior Trader, Andrew Barnett reviews his thoughts on the Economy and the state of the economic climate.... I will give you an example of the Aussie economy being unbalance first and then look at other parts of the world so you can appreciate the unbalanced economic world we live in.

A perfectly balanced economy is rare but the role of Central Banks is to maintain price stability which should maintain a reasonably balanced economy. If a country becomes too reliant on one sector of the economy to perform (e.g. The mining sector in Australia) then when that sector softens it puts increased pressure on other sectors to make up the slack and if they are not able too then you have an unbalanced economy where inflation and interest rates are low, unemployment and the currency rises in the case of Australia but certain sectors such as housing can rise beyond normal levels and cause bubbles that burst.

While a country is trying to rebalance its economy we can often see budget deficits rise substantially and debt bubbles are created that can often take years to pay off or reduce. This can cause a rise in bond yields and cause economic mayhem if not kept under control.

In part what I described above is happening in Australia. We were heavily reliant on the mining sector and China to keep Australia out of a recession through the GFC but the economy became unbalanced and now that the mining boom is over the RBA is struggling to balance the economy once again. The RBA's big lever is interest rates which normally would substantially lower the Aussie dollar when they put rates down, (since Sept 2011 rates have gone from 4.75% to 2.5%)  increasing domestic growth and helping our tourism and export sectors which would rebalance things. Inflation would normally rise and with a bit of luck unemployment would not rise and may even go down. But this is not happening. The Aussie Dollar is rising, inflation is low, unemployment is set to rise in the next 12 months, job ads are dropping, the government’s debt is growing and housing because of lower interest rates is starting to rise too quickly. Things are not balanced and the RBA is running out of options and if the US Fed does not taper until mid 2014 I suspect the RBA will need to put interest rates down one more time as it is one of the only options that it has left to try and rebalance things.

Here are some other examples of an economy that is completely unbalanced. In the USA the stock market is at all time highs and the housing sector has risen between 8% and 20% in the past 12 months. But the US Federal Reserve is completely responsible for these rises in value in both sectors of the economy which is Wall St and every day Main St.  It is pumping $85 Billion dollars of money it does not have, that it magically created into the economy to try and keep interest rates low and drive growth and jobs. It worked for a while but it’s no longer working and the US economy is now like a drug addict, hopelessly reliant on the US Fed to keep growth going, hopelessly reliant on the US Fed to prop up the stock market and hopelessly reliant on the US Fed to try and create jobs of which is no longer happening.

The USA is a classic example of a hopelessly unbalanced economy and Australia whilst not in the same boat thankfully, is sailing on the same unbalanced ocean.

2014 could be the year financial markets need to correct themselves because the UK in my view is getting unrealistically too far ahead of Europe, Europe is once again going backwards ever so slightly and the UK cannot shine like a diamond without Europe glistening in the morning sun.

Australia and New Zealand who normally grow in line with each other are out of whack (the Kiwis are beating Australia in just about all facets of economic growth) and when you do the research on Asia, India is a basket case, Indonesia is not far behind and China has its own issues to deal with, and will do so extremely well because they are a communist country and effectively have better control than everyone else, like it or not that is a fact.

I am an optimist at heart but I am just warning you now that if you fall in love, love can often be blind and when it comes to money falling in love with a position or direction can be very costly if you close your eyes.