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Where Is The World Economy Headed?

The economies of all the nations of the world are more inter-linked than they have ever been before- nothing happens in isolation. First I will state my opinion of where we have been, then where we may be headed.

For at least the last seventy years the US economy has been the big dog of the world's economies. Whatever happened here pretty much dictated what happened in other modern western economies as well as third world economies. This is still true today. Demographic trends have been and will continue to be favorable for the US, largely because of immigration. There will be demographic bumps, such as the retirement of the baby boomers, but the longer trend is still positive.

While China has emerged as a major economic power, it is highly dependent on American markets to consume what it produces. China has a powerful economic pull over many countries that supply it raw materials. Demographic trends have been favorable for China up until now, but will start to deteriorate in several years. China has paid a huge environmental price for it's industrialisation. The US effectively exported the pollution costs of modern society to China, which is now at a breaking point.

Japan's economy has been stagnant for the last thirty years, largely as a result of demographics, which will continue to deteriorate going forward.

Europe's demographics have and will continue to dictate a stagnant economy. Socialist policy in Europe is also a major headwind for economic growth.

Third world economies are largely based on resource extraction and cheap labor. They are completely at the mercy of the US, Europe, and China.

Starting in about 1983, interest rates began a long term decline in the US (with the world as a whole following) that culminated in a massive worldwide credit bubble that popped in 2008.

Also beginning in the early 1980's, the information age- tech revolution got under way, culminating in the invention and worldwide deployment of the internet. I believe the information age represents one of the last steps of the industrial revolution that began in the mid 1800's, and kicked into high gear with the advent of petroleum extraction and utilisation.

The low hanging fruit of cheap resource extraction, rapid technological advancement, and worldwide population growth, has been picked. The going gets tougher from here. On top of that, we are in the midst of a worldwide credit contraction. The Fed's quantitative easing programs had marginal benefit, being more effective psychologically than economically. The shale oil boom had much more to do with our recent economic recovery than monetary policy. The downside of artificially low interest rates is starting to manifest itself in asset bubbles that are popping.

Germany's more conservative monetary policy has gotten a lot of bad press for stagnating the EU, but has been sounder long term policy than the US Fed's. The EU's problems are more based on fiscal policy and demographics, and won't be solved by EU QE.

China's period of rapid growth is ending. The structural problems of a command economy are starting to emerge.

Third world economies had their day in the sun with the influx of capital brought on by the commodity super-cycle, but are now in the throes of low commodity prices compounded by high debt levels.

So the crux of the matter is : can the US economy pick up enough steam to pull along the rest of the world? Tough question.

First off, low oil prices are absolutely a plus. Cheap energy spurred on the entire industrial revolution.

Second, technological advancement looks iffy to me. Yes, things will move forward, but not at the rate they once did. And increasingly, technology will eliminate low knowledge jobs and continue to widen the wealth gap. While the Nasdaq used to thrive by disrupting legacy industry, it will become more a matter of cannibalizing itself.

Third, employment as a percentage of working age population is still terrible, and hasn't and won't support wage growth. That pretty much dooms the housing market, formerly one of the main drivers of the US economy.

The Fed's economic policies were never all that effective. Fiscal policy such as massive public infrastructure investment would be beneficial, but is unlikely in a grid-locked congress. Further asset bubbles caused by low interest rates will be a big problem going forward.

So the US economy looks sideways at best in the future to me. The worldwide economy looks poor, with populism, and social unrest being a major risk. Deflation looks like a real risk at home and abroad. Equities have milked the most that can be expected out of low interest rates. Earnings growth prospects look poor with a rising dollar and shaky economic prospects in the rest of the world.

Disclaimer: You would be crazy to make investment decisions based on the opinions of a nobody like me.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SH RWM PSQ over the next 72 hours.

Additional disclosure: You would be crazy to base any investment decisions on the opinions of a nobody like me.