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Commentary & Analysis
Global macro says U.S. might win in the end after all …
There is little doubt the doom and gloom crowd has the upper hand when it comes to sentiment about the U.S. economy and its future in the world. I know many want their doom and gloom beliefs validated, and therefore it’s burning-at-the-stake time for one to be the least bit optimistic about the future of the U.S. at a time like this. But let me give it a try and see if makes any sense to you.
I am not going to deny there is a host, a virtual plethora, of reasons why it looks ugly for the U.S. But, this game of winning and losing among competing nations is a relative game. In the world of global macro analysis, one country’s negative adjustment process can be another’s positive gain. That is the essence of the argument.
For you to accept my argument, you must ultimately agree with the following two premises:
- Decoupling of the emerging market world is still a fantasy; coupling lives because consumer demand still flows primarily from the center [industrialized nations’ demand] out to the periphery [emerging and developing nations].
- In times of falling global growth, current account surplus nations take the negative brunt of the adjustments.
If you accept those two premises, you can see right out of the gate why the U.S. is in a position of relative gain in a world which may be poised for slower growth and possibly outright deflation. The U.S. is by far the largest single consumer market and is the world’s largest current account deficit nation.
Already I suspect many are thinking: “What a nut!” Understandably so, given what you have seen that passes as global analysis, since you’re conditioned to believe current account surpluses are the ticket to safety and prosperity. In fact, what triggered this missive was a story I read yesterday by some analyst, I forget where, who said large fx reserves are “doing what they are supposed to protecting the BRIC nations.” The writer evidently disagrees with my two initial premises.
And I am not saying that it is a bad thing to be in surplus; but I am saying given the distribution of imbalances across the global spectrum at this point in time, when the U.S. is still the global buyer of last resort, China is keeping growth alive only through massive internal malinvestment, and the eurozone has the mother of all imbalances from which to extricate itself, surplus nations will find themselves in Wiley Coyote, out-over-the-cliff zone, as the world will be forced into rebalancing by various means. On a relative scale, the U.S. wins, even if it isn’t exactly pretty for anyone.
Here’s why the U.S. wins, and I will keep it as simple at possible, lest you fall asleep…
- The world is extremely leveraged as it faces yet another “peer into the abyss” moment. Much of the ongoing private deleveraging since the credit crunch has been replaced by public leveraging called “fiscal stimulus and monetary ease.” Debt on top of debt is not a recipe for real growth. If it was, Zimbabwe would be an economic model we all emulate. Despite howls to the contrary, from many who believe in the debt on top of debt growth policies, the market will win this one. And in the process the massive wall of liquidity from this stimulus, that pumped up the BRIC nations, will decline. Investment, not consumer demand in these nations, will take a hit. And with it, so will GDP growth. This will trigger a self-feeding run to safer ground which includes deeper capital markets. Despite the downgrade in the US credit rating, US capital markets still play the role of hiding place for large pools of capital and will continue to do so until an alternative appears.
- Declining global demand is already leading us down the path of currency war (the implicit name for trade protection). Switzerland’s latest move is just another skirmish in the ongoing battle to protect local exports. China can ill afford to let its currency ramp up in this environment where exports have already been impaired.
As politicians everywhere run out of stalling tactics and stimulus money, yet local jobs haven’t returned, the cry to “bring jobs home” will grow louder. I believe the currency war will morph more directly into explicit trade barriers. The US wins big-time in a trade war, and those dependent on the US demand lose big time. Why? US companies have a deep market here at home, something other countries don’t have to the same degree. More jobs would actually be created if local industries are protected by barriers (not necessarily good for long-term competitiveness, but we are speaking intermediate-term realities here). The so-called “dangerous” US current account deficit would fall, as US citizens by fewer goods from those surplus nations outside the US. A falling US current account would also mean the US would become less dependent on international capital flows, but the flipside is as US demand is taken out of the world economy, surplus nations would become increasingly dependent on those investment flows to keep growth alive. But it won’t happen because more investment in the BRICs only means more excess capacity that won’t be taken in world markets, and local demand is still too low on a relative basis to keep GDP growth strong. Thus, the investment flow would reverse quickly back to the center, a la the US.
Needless to say, this is only a very brief overview. But I think you can at least see there is an alternative story to US doom and gloom. It’s why I can’t personally buy into the rationale that says the US is going to hell in a hand basket but the rest of the world will be just fine.
As always, time will tell which story rises to the top.
Note: Even the elites are thinking deeply about the restoration of America; time to think of America first and rebuild at home so we can be stronger in the future. This I think dovetails on the idea the US can win the global macro game in the current environment, especially with the many challenges facing China in its inevitable transition to a more consumer-driven economy. It makes strategic and geo-political sense to me. Here is an example I think of that type of thinking by one the elite policy makers–Richard Hass, President, Council on Foreign Relations, in a piece titled, “Bringing Our Foreign Policy Home.” Isn’t interesting that when Pat Buchanan or Ron Paul call for the same they are treated like pariah and called the most dreaded word in the elite vocabulary–“Isolationists.” Ahhh … run! Lock up the women and children …