Risk of global recession in 2014, says Economics Nobel winner

Highly indebted governments in the United States and Europe pose a constant threat to the international economy, he told a news agency. ‘There may come a point where the financial markets say that none of their debt is credible anymore and they can’t finance themselves. If there is another recession, it is going to be worldwide,’ he warned.

Fama, who is often referred to as the father of modern finance and shares this year’s Economics Nobel for research in market prices and asset bubbles, however, played down this week’s strong US labour market data. ‘I am not reassured at all,’ he told the news agency.

The US jobless rate fell to a five-year low of 7 per cent in November and American employers hired more workers than expected. ‘The jobs recovery has been awful. The only reason the unemployment rate is 7 per cent, which is high by historical standards in the USA, is that people gave up looking for jobs,’ observed Fama, who had argued as far back as in 1970 that markets are efficient and prices reflect all publicly available information.

‘I just don’t think we have come out of (recession) very well,’ the financial wizard insisted. Asked what he thought of the current high stock market prices, he explained that companies have become much more efficient after the 2008-2009 financial crisis.

‘The response of companies after the recession was to slim down, get much more effective and they got very profitable, so their prices continue to appreciate,’ added Fama.  The University of Chicago economics professor’s theory implies that one cannot systematically outperform the market.