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Most of the World Panics — Is the US Next?

  • Written by Syndicated Publisher No Comments Comments
    November 29, 2014

    In late October Japan, despite a year of fairly aggressive quantitative easing, dropped back into recession and concluded that even easier money was the cure for its ills. It announced a debt monetization plan of almost science-fictional proportions in which the amount of new yen to be created, as a percentage of GDP, will be equivalent to $3 trillion a year in the US. SeeReactions to BoJ’s Kuroda’s Stunning, Doubled-Down QE ‘Experiment’

    Then the European Central Bank, after years of operating in Germanic tight-money mode, finally accepted that a shrinking money supply was pushing the weaker eurozone countries into depression. On November 21 it threw caution to the wind and began buying up (by the sound of it) pretty much every stray piece of paper that’s blowing in the Continental wind. See
    Mario Draghi Says E.C.B. Will ‘Do What We Must’ to Stoke Inflation

    Most recently China, whose massive purchases of raw materials became the engine of the post-2008 recovery, discovered that much of the debt incurred to build those entire new cities is about as likely to be paid back as a typical subprime mortgage circa 2007. So it announced a surprise interest rate cut and a promise to do much more if necessary. See China’s surprise rate cut shows how freaked out the government is by the slowdown and Fear Of “Surge In Debt Defaults, Business Failures And Job Losses” Means Many More Chinese Rate Cuts

    These are not the actions of economies in sustainable recovery but of countries falling into an abyss. Such open-ended offerings to the market gods are explicitly designed to get the juices of stock traders flowing. But so far that’s all they’ve done. Here’s a chart from Zero Hedgeshowing how each year’s initial GDP optimism has faded even while equity prices have continued to rise.

    World equities versus GDP 2014
    So, two questions:

    1) Will stepped-up debt monetization and interest rate reductions succeed where the past batch failed? Not likely, for both practical and theoretical reasons. There’s just too much debt outstanding to allow normal market mechanisms to produce sustainable growth. There’s simply nothing that Italy or Japan can build with borrowed money that will generate a positive return, given how much they already owe. So those descending GDP estimate lines will soon be joined by a new one with the same arc for 2015.

    2) Can the US remain aloof from the carnage taking place all around it? Also not likely, since the actions being taking by our trading partners all coalesce around a single data point, which is a more expensive dollar. The US has had a relatively smooth few years because Fed policy was relatively easy and the dollar, as a result, was relatively weak versus the yen and euro. Now both of those trends have reversed in a big way. Here’s the dollar versus the world’s other main currencies over the past year:

    Dollar index November 2014

    Where the previously-strong euro and yen pushed Europe and Japan into recession, a strong dollar will impose the same headwind on the US in 2015. So there’s a decent chance that a year from now we’ll be faced with a world in which debt monetization has failed in three of the four major economies and a strong currency has sucker-punched the last one standing. And the only politically-acceptable response will be more of the same. Why isn’t gold soaring?

    Images: Flickr (licence attribution)

    About The Author

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    DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

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