Though I write mainly about US economic and investment issues, I try to be think globally as I consider macroeconomics. I think that many economists are hobbled because they think about the US economy in a closed framework, neglecting the effects that the rest of the world has on the US. Prior to the end of the cold war, that was a useful shortcut, but now many aspects of the US economy depend on global, and less on local factors. (Some articles cited here will be dated, but are still relevant in my mind.)
This article is meant to take you through six themes affecting the global economy. Here goes:
I’ve been writing about neomercantilism and China now for almost five years. The negative effects are now obvious. Inflation has been rising in China, because too much credit is chasing too few goods. That inflation is funneling into US goods prices as well. China exports too much, and imports too little, which forces them to import US credit. This is getting tired, and the Chinese and Middle Eastern savings gluts need a new place to invest, or better, new goods to buy. Absent these adjustments, in order to cool the economy, the PBOC keeps raising reserve requirements again and again. Better they should revalue the yuan up 20%, or they will continue to import inflation from the US.
China has its growing pains amid this. Pollution is rampant, and standards for product safety are low. Beyond that, China now competes with the US and Europe for economic alliances in Africa. Given past bad blood there, the Chinese may at many points be better received, that is, until they abuse their welcome.
The main question here is the demise of “Bretton Woods II” where the rest of the world uses the US Dollar as the main reserve currency, while the US continues to debase the dollar through the issuance of more dollar claims. You can read about it in any of the following articles:
- The end of the United States exorbitant privilege?
- Imbalancing act
- Has the moment come to replace the US dollar?
- Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve (Now, I would argue with Jimmy Rogers over a number of his facts, but he has the main thrust correct.)
Now, Ken Fisher told us not to worry about the declining dollar, but the euro-yen exchange rate. It’s too early to say, but that exchange rate is flat, while the S&P 500 is off 7% or so. Perhaps the overall carry trade is weakening, but not with the euro as a currency to purchase, yet.
Finally, not only is the weak dollar good for exports, but for tourism as well. Now maybe they buy some of our slack houses as well…. please?
Inflation, Especially Food Prices
All the buzz is over rice, which has risen fivefold in six years. You can read about it here:
- Forget oil, the new global crisis is food
- Inflation AND Political Unrest!
- Food prices ring alarm for Asian nations
- Jump in rice price fuels fears of unrest
- Rice Jumps to Record, Corn Near High as Demand Outpaces Supply
Now, that inflation is feeding back to the US, but slowly. You would think that this would be a great time to eliminate US farm subsidies, but no, they are too effective at buying votes insuring economic stability in the Midwest.
Recession Fears in the Developed World
Now there are similar stresses in housing in some places of Europe, as compared to the US. Consider Spain (and here), and the UK. Low-ish interest rates can lead to overbuilding anywhere, if the regulators look the other way. Japan may not have housing worries, but their growth is slowing, and they worry about the next recessionary leg of a what is proving to be a long recessionary era (since 1990).
It doesn’t matter how you slice it, Chavez has mismanaged the Venezuelan economy, and particularly the oil industry. Now he is trying to do the same thing to cement. Venezuelans are experiencing shortages and high inflation, as Chavez directs resources that he has stolen nationalized to his cronies and his foreign interests that he funds in order to make life difficult for US foreign policy in Latin America (not that I am a great fan of US policy there — I only recognize the conflict).
The Middle East has lots of new oil fields to tap at the right price, yes? Well, I’m not so sure. It is interesting to see the UAE develop a nuclear program. Perhaps they are looking to a day when oil will not be so plentiful? Then again, maybe we will have a big energy find in Greenland (an island that may once again be green, now that temperatures are rising to levels last seen in the middle ages).
Coming back to the beginning of the article, emerging markets (like China), are going through an adjustment period. Since these two articles were written, emerging market equities have fallen significantly. They may fall further; many of those nations are geared to global growth, and when it slows, it slows even more for them. Many of them are absorbing US inflation as well, and need to raise their exchange rates. That will hurt exports in the short run, but will aid in bringing economic stability.