Dec. 7 (Bloomberg) -- David Einhorn, president of hedge-fund operator Greenlight Capital Inc., said the global economy will face a sovereign debt crisis after governments around the world increased spending to deal with the fallout from the financial crisis.
“We managed to transfer a lot of the problems from the private sector to the public sector,” Einhorn said in an interview with the Charlie Rose television show. “It’s created a very, very large budget deficit. And it’s created a monetary policy that’s extremely easy. It is eventually going to come to a tough spot.”
Global stocks slumped 2.3 percent last month amid concern Europe’s debt turmoil may spread after Ireland’s bailout has failed to convince investors that the crisis will be contained. Standard & Poor’s said last week it may cut Portugal’s credit rating. Prime Minister Jose Socrates has rejected suggestions the country may need a bailout.
Hedge funds declined the most in six months in November as the debt crisis pushed stock markets lower. The Bloomberg aggregate hedge fund index fell 1.5 percent, the most since May, when a sudden selloff in stocks known as the “flash crash” prompted investors to cut risk.
The U.S. reported on Oct. 15 its second-largest annual budget deficit, $1.29 trillion, for the fiscal year ended Sept. 30. The Federal Reserve’s decision to buy an additional $600 billion in Treasuries to lower borrowing costs and stimulate the economy will probably result in rising prices of basic goods for consumers and businesses, curtailing economic growth, according to Einhorn.
“It’ll be counterproductive,” Einhorn said. “The goal of quantitative easing right now is to raise the inflation rate. If you do raise the price of clothing, it effectively lowers everybody’s standard of living and gives them less money to buy other things.”
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