Even if the US can avoid a hard landing in the short term, as equity dealers believe it can, the medium and long-term risks to the economy remain. Optimism seems to be inspired by falling oil prices and the expectation that the next move in interest rates from the Federal Reserve will be down.
It is an optimism not shared by the bond market, which is sending out clear warnings of impending recession. It is possible those who have pushed the Dow back well over 11,000 points have got it right. Many economists believe, however, that the equity market has got it wrong. They can hear the sound of fluttering wings as the chickens come home to roost.
Stephen King, chief economist at HSBC, has downgraded his forecast of US growth next year to 1.9%, and believes that by the end of 2007 the economy will be expanding at only just over 1% a year. That, by US standards, is very slow growth and would certainly lead to a sharp jump in unemployment…And the wisdom of curing the hangover from one bubble by another binge has to be questioned.
It’s a long article with the sort of endless paragraphs economists love. Click the link and take the time to read it all. Whether you end up agreeing or not. — it’s useful information.
Consumers have been using their homes like ATMs – borrowing against rising prices – but this cannot go on forever…They argue that it is perfectly sustainable to run sizeable deficits in perpetuity because the dollar’s status as a reserve currency means that there will always be demand for US assets. But, running a permanent trade deficit affects the structure of your economy. It means fewer manufacturing jobs where productivity tends to be higher and more jobs in the service sector, where productivity tends to be lower.
And the service sector is pretty easy to outsource.
Throughout history, there has always tended to be one dominant reserve currency along with a host of lesser rivals. In the 19th century Britain was the pre-eminent economy and sterling was the main reserve currency. Yet currencies don’t retain their dominance forever; part of Britain’s problem at the time of Suez was that it was struggling to adjust to a world in which it was no longer the top-dog currency but the creditors came knocking at the door asking for their cheques to be cashed. The US is living beyond its means, hoping that nobody cashes the cheques it has been merrily writing as the current account has gone deeper into the red. That’s the advantage of being a reserve currency, even though, as Avinash Persaud notes, there is no rule which says that you have to run current account deficits simply because you are a reserve currency.
Persaud thinks…that in the next few decades the dollar will start to lose its reserve status just as sterling did in the last century. “In the case of sterling’s loss of reserve status, world war one and two accelerated a process that had begun more slowly before and ended abruptly with debt and inflation.”
As Persaud rightly says: “If it was economically and politically painful for the UK, even though its international financial position did not begin from a position of heavy deficit, what will it be like for the US which has become the world’s largest debtor. There will be an avalanche of cheques coming home to be paid when the dollar begins to lose its status.”
Thanks, Tom, for pointing out this article. Especially since you’re our nearest kin who doesn’t have an account with HSBC. :)
Yes, very good read.
Indeed the challenge is to become partners with those countries and develop a win-win strategy. The global trend appears to be outsource the manufacturing and service lines to Asian countries. How can the North American countries develop an economically feasiable, environmentally friendly and cost-effective strategy so that everyone will benefit? The government and private corporations will need to work together closely beyond looking at just the bottom line. How can we balance between the returns to the share-holders versus the protectionism?
From the article: “And this “avalanche of cheques” is likely to make for the most horrendous geo-political tension. The idea that the US will give up global financial hegemony without a fight seems fanciful in the extreme.”
The problem is we have been losing financial hegemony for a few years now. When Venezuela tried to sell oil in Euros instead of Dollars, we tried to overthrow their president (which is why President Chavez hates Bush so much). Why did we go to war in Iraq? Obviously it wasnt WMDs or nuclear capabilities of Iraq, it was because Iraq started selling their oil in Euros instead of Dollars. Iran is also threatening dollar hegemony by selling in Euros, and now we are threatening war with Iran.
Congressman Ron Paul had a lot to say on this issue in a speech he gave last february.
What does all this mean? If the US is the biggest debtor, that means it is the one paying the mortgage, and those mortgages are going to be paid in dollars whether the creditors like it or not, since that’s what is in the original contract. Who cares what currency the other countries use. The only reason there is so much debt is because people are willing to lend the money, they think they’re getting value for those treasury bonds.
The question in my mind is why we are somehow failing with a growth rate of “only” one percent? You can only stoke the fires so much, at some point they must be banked, inviting a certain degree of much needed stability.
The economist with the cool name didn’t necessarily say it was a bad thing, it’s all the self-anointed experts that claim we must run like frightened chickens to keep up.
if this country is still dependent of middle eastern oil in 2056 the republic will have fallen long before that. we can’t keep absorbling all the costs that come with illegal immigration, protecting “friends” in europe, middle east, asia, the medical costs of the aging baby boomers… all the while jobs are being deported. the center will not hold. our only bet is that technology will allow us to drastically reduce our dependency on oil… if we can’t… we won’t make it another 50 years without a huge collapse somewhere before then.
#4 It means that they will take your house away and you’ll be on the street paying $100 for a cup of coffee, ‘couse that’s how much the dollar will be worth without balanced and strong economy….
In this case, they can’t do both. The only possible problem is that the US economy will implode, and make the debts harder to repay. Then the US just prints more dollar bills. The other countries have to take them, since that’s all that’s being promised by Treasury bonds. With all these new dollars, we get massive inflation and prices skyrocket. Of course, the US could default in which case interest rates go up and we get lots of inflation again. Or the economy stays stable, and the US pays its bills. The other countries economic strength or weakness is meaningless.
The other countries economic strength or weakness is meaningless.
That’s not true, the only reason why others are still investing/keeping US currency is that our economy is still #1, if that will change for worst and it is changing that way, and at the same time some other power will emerge (China) dollar will go bye, bye… It’s like with banks – are you going to keep your money in the bank if you find out that they overspend on BS – yes, you will as long as this is the best bank around, however, you will change it if there is equal or better option that doesn’t overspend on BS, and whoever will change banks last will lose …. or your original bank will finally start making smart decisions and get his affairs in order, then as a good old customer you may stay.
Yes, but banks can’t print their own money. People invest in US economy because they think they will get a return on their investment. They buy treasuries to get the interest paid. I don’t see the implied horror story here.
Horror story? You said it yourself – printing money to get out of debt, that’s one horror story, the worst kind! imagine your retirement account of $100,000 being actually worth $1000 – that’s horror to me; losing your “customers” that’s other – like I said, with the economy going the way it is it can be one, unless we eliminate debt/trading deficit in which case it could be painful, but maybe not a horror….
It comes to 1 option.
GIVE the consumer more value for his money.
Less profits to the TOP of the corps and abit more money in the poor pocket.
The article really just shows that we are given a basic choice. Either we seek to retain our position and our standard of living or we give it up to another country. If we give it up, then they not us will be calling the shots.
If we aren’t capable of maintaining our economic position we won’t be able to maintain our military position either.
Does anyone believe becoming part of the North American Union, NAU, is going to really change this. Right after the American revolution it was the issue of individual State debt that allowed the Federalist to bring about our current Federal system of government. Again they are plannining on using debt to bring about the NAU. Sure it’ll be volentary membership, just like the South thought during the Civil War. Today it’s not voluntary, nor will the membership in the NAU.
The choice is clear, the Constitution and our rights or globalist dictators coming in and raping our country and our people. But then again our Gloabalist elites are doing just that. There is always money to be made in both the building up of a civilization and it’s downfall.
I think most Americans have no idea why this is a big HAIRY story:
Over here in the middle east, there is serious talk about ending the Petro Dollar and going to the Euro.
One of the main reasons is they are pissed at the USA, the other reason is they want to de-link themselves from the Bush/GOP fiscal rat hole.
The biggest thing stopping them is all the US debt they are holding which would take a huge hit, so the Bush fiscal bungle actually has a temporary silver lining.
I saw this in another spot and it rings true here:
The 19th century belonged to Britain.
The 20th century belonged to the United States.
The 21st century will belong to China.
The U.S. has its head in the sand. We need to come to grips with the fact that China will become the world’s economic, societal, military, and manufacturing powerhouse, and the U.S. will no longer call the shots. Oh, we’ll keep making noises like we still matter, but the rest of the world will see the truth. Our threats will no longer carry as much weight as China’s.
Sell your U.S. dollars, buy Chinese renminbi, and invest in the Chinese stock market. Regarding the U.S.: stick a fork in it. It’s done.
Deal with it.
Did anyone see that amusing mock documentary about China and how simple economics showed they would take over as the financial leader in the world? I’ve seen it once and I have searched for it repeatedly since then, but I have been unable to find it. If someone has a link, I would really appreciate it.