An article in yesterday’s US print edition of the FT and one in the Wall Street Journal calls into stark contrast the risks the US government is facing. Just at a time that China, fully representative of one third of the positive pull through in global growth in the current expansion (note the US only accounts for 13%), is showing serious signs of a slowdown, the US is showing signs of being unable to respond to any negative change in global economic climate.
The FT article, Problems for China’s Economy extend far beyond currency, suggest that China is struggling to cope with the factors unraveling around them. The latest attempt, a lowering of their currency value in an attempt at preventing the ongoing fall in exports, is not going to make much of a difference. Worse, such single-sided policy uncoordinated act is what begets retaliation, and could even trigger the Fed to not raise interest rates in September.
The Chinese economy is slowing down. Its state debt is at extreme levels and showing no signs of slowing down. Exports are down, leading to depressing commodity prices across Asia. The stock market bubble is more of a white knuckle ride as more and more of the so called ‘free market’ is either managed by government rules or off the market overall. China is following classical economic behavior in spending its way through a recession at a time it is already burdened. It’s slow down continues and shows no sign of abating.
At the same time, the US is in no fit state to weather a slowdown or recession. The article today, US lacks ammo for next economic crisis, is a chilling reminder of the sorry state of affairs. If we were but talking of our very own household finances we might have to declare bankruptcy. There is no wiggle room for interest rate reduction to spur growth – other than to experiment on the largest economy in the world with negative rates. And what would happen when investors and organizations are charged to save with a bank? What then for the financial industry that should be powering the investment for the future? Even with free money today most of that cash has not been spent on high growth opportunities for the economy. All the cash seems to go to the investment-class.
US Government stimulus/QE has had mixed reviews – even the Fed now thinks QE did little to boost the economy. We have not seen the expected multiplier effect in any form of trickle down growth. One chilling chart in the article from data supplied by the CBO, suggests that by 2040 federal government debt held by the public as a % of GDP will approach the same level of debt as at the end of World War II. Yes, and we don’t even have a war or rebuilding to contend with. This is just mind-boggling. Again, if this were my personal debt “curve” I would be embarrassed firstly and aggressively cutting back to live within my means. The US federal government is not doing this.
So timing is against us. China, the source of most of the recent economic growth, is suffering a cold and the US is operating more like an aged man, tempered and lacking any sizable vitality or energy for the next sprint. It is hard to see how things will improve. No policy seems to stand out, no political party seems that interested in talking the truth, and it seems we are just hoping for a good outcome. I cant see through any amount of tea leaves at present to warrant a rate rise in September. My guess is February (assuming consumer spending over the holidays does not crash).
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