China & India calling the shots when the US is no longer top dollar
Even if the US can avoid a hard landing in the
short term, as equity dealers believe it can, the medium and long-term risks to
the economy remain. Optimism seems to be inspired by falling oil prices and the
expectation that the next move in interest rates from the Federal Reserve will
be down. It is an optimism not shared by the bond market.
Even if the US can avoid a hard landing in the short term, as equity dealers believe it can, the medium and long-term risks to the economy remain. Optimism seems to be inspired by falling oil prices and the expectation that the next move in interest rates from the Federal Reserve will be down.
It is an optimism not shared by the bond market, which is sending out clear warnings of impending recession. It is possible those who have pushed the Dow back well over 11,000 points have got it right. Many economists believe, however, that the equity market has got it wrong. They can hear the sound of fluttering wings as the chickens come home to roost.
Stephen King, chief economist at HSBC, has downgraded his forecast of US growth next year to 1.9%, and believes that by the end of 2007 the economy will be expanding at only just over 1% a year. That, by US standards, is very slow growth and would certainly lead to a sharp jump in unemployment…And the wisdom of curing the hangover from one bubble by another binge has to be questioned.
It’s a long article with the sort of endless paragraphs economists love. Click the link and take the time to read it all. Whether you end up agreeing or not. — it’s useful information.
Consumers have been using their homes like ATMs - borrowing against rising prices - but this cannot go on forever…They argue that it is perfectly sustainable to run sizeable deficits in perpetuity because the dollar’s status as a reserve currency means that there will always be demand for US assets. But, running a permanent trade deficit affects the structure of your economy. It means fewer manufacturing jobs where productivity tends to be higher and more jobs in the service sector, where productivity tends to be lower.
And the service sector is pretty easy to outsource.
Throughout history, there has always tended to be one dominant reserve currency along with a host of lesser rivals. In the 19th century Britain was the pre-eminent economy and sterling was the main reserve currency. Yet currencies don’t retain their dominance forever; part of Britain’s problem at the time of Suez was that it was struggling to adjust to a world in which it was no longer the top-dog currency but the creditors came knocking at the door asking for their cheques to be cashed. The US is living beyond its means, hoping that nobody cashes the cheques it has been merrily writing as the current account has gone deeper into the red. That’s the advantage of being a reserve currency, even though, as Avinash Persaud notes, there is no rule which says that you have to run current account deficits simply because you are a reserve currency.
Persaud thinks…that in the next few decades the dollar will start to lose its reserve status just as sterling did in the last century. “In the case of sterling’s loss of reserve status, world war one and two accelerated a process that had begun more slowly before and ended abruptly with debt and inflation.”
As Persaud rightly says: “If it was economically and politically painful for the UK, even though its international financial position did not begin from a position of heavy deficit, what will it be like for the US which has become the world’s largest debtor. There will be an avalanche of cheques coming home to be paid when the dollar begins to lose its status.”
Thanks, Tom, for pointing out this article. Especially since you’re our nearest kin who doesn’t have an account with HSBC.
Posted: Mon - October 2, 2006 at 06:05 AM