Economic Headwinds Ahead for America

"Opinion"

08/12/2012

Paul Munnis


The traditional way to deal with government debt is to debase (devalue) the currency making it of lower value in terms of international exchange rates. So we borrow expensive money and we pay it back in less valued currency having lesser buying power and debt becomes more of a political talking point than a threat..

America is now poised to do that if the Euro Zone breaks up into a series of separate currencies.

If Europe does not collapse than another round of quantitative easing (QEIII) could be in store for the U.S. since the Fed is also primed to do that should it be needed.

America is crafting a straddle plan to survive what could lie ahead.

The former move (devaluation) leaves us paying off long-term debt with cheap dollars.

The latter move leaves us with reduced Federal Debt and an instant cash infusion into the money supply. This leaves too many dollars chasing too few goods and a mini retail boom results with a surge in consumer buying and retail job hiring to absorb the surplus cheap goods.

So that is where the Fed is at right now, they have worked out a way to straddle world economic conditions and are prepared to assure that America, the world’s largest and biggest economy, survives no matter what happens to the global economy.

Right now Geithner is telling us to discount debasing of the dollar, he thinks that Europe will muddle through, and Bernanke has told Congress that the Fed is ready to move on QEIII, if that is needed.

Meanwhile in Europe the Euro Zone itself (some 17 nations) and their international currency the Euro, are under pressure over government debt and there is confusion over which direction they will go. Their direction will determine which American course of action happens.

At the moment, in the short term, the Stock Market is betting on the Euro surviving and muddling through with more loans and with Germany covering much of the debt position. In return a severe recession results in Europe and while Greek style austerity is avoided then European society will still pay a high price in lost employment, devalued currency, lack of currency reserve, and robust opportunity as the European middle class collapses. The antidote is development causing national growth but such development seems to be not discussed publically. Europe needs a massive shot in the arm for their macro economies to survive and recover something much like the Space Race was for America in its day.

While Germany is poised as a financier of last resort for European debt let’s note that Germany itself is an export nation and is surviving only from strong export sales. Should world recession develop then Germany’s export markets could collapse and their market guarantees become flawed.

The effect of this on China is terrible. This nation is committed to becoming the industrial center of the world and is sponsoring a shift from an agrarian society to an industrialized society and is arguing politically that the Communist Party is working for the good of the people. Thus they have an export economy but with Europe cutting exports then the only developed consumer market left for China is known as “the Americas.”

“The Americas” is the union of Canada, the U.S., plus Central and South America. Collectively this is called “the Americas” and it is a huge market.

However when we examine the Central and some of the South American markets we see nations like Guatemala, Chile, and Mexico in terrible need of industrial development and thus in direct competition with China. We see other nations like Brazil and Venezuela seeking to act as export nations and in competition with China, Japan, and othe Pacific Rim nations.

Elsewhere India and Pakistan are in dire straights and have an export economy too and all are competing for dominion of both the Euro and U.S. markets. The likely outcome is that they will split the markets thus causing recession in China and India plus Pakistan and perhaps maintaining the status quo in Central and South America. Brazil seems best poised in South America to muddle through for they have established markets in the U.S.

So what are the long-term prospects? Nobody really knows. Our ability to see beyond this level is cloudy.

A confusing factor is mid-east oil for its use is mainly in transportation and manufacturing. With manufacturing reduced, Alternative Energy development is an imperative to create jobs, and transportation is going hybrid and electric. America has plenty of oil of its own right now and there is a huge cache of natural gas. We are not in need of continued oil imports to America. That leaves a huge wad of cash afloat in the world, it is controlled by Arab nations, and as a result of the Arab Spring these Arab economies need investment, development, and job creation must result. Much by way of economic challenge exists for the mid-east.

Some predict that Japan will be injured in the export based economy of the Pacific nations. This is why Japan has diversified its manufacturing and moved much of it into the markets that they are most dependent upon for sales. The result is they have become a part of the economy of the nations that they serve and have skin in the game of their key dependent national economies for sales.

Some predict riots and revolution in China but I am not so sure of that. China has become such a monolith that they badly need a government to help them muddle through and the Chinese government is likely to do this by shifting from exports to creation of a more consumptive society with more of manufacturing going to improve the quality of life of the Chinese people. An obvious industry to absorb Chinese workers is defense development as ship yards, aircraft manufacturing, and arms are manufactured for national use. This will make the west nervous but what’s new?

We note that internal consumption is going to put pressure on the Chinese currency unit and it will become debased as a result. The impact to the U.S. is to shrink the Chinese debt by a huge margin and thus further ease our foreign debt burden. Timing is the key thing here. If this happens soon and swiftly then the U.S. debt will drift under control and no sort of QEIII will be needed for the drop in Chinese debt by around 40-50% will be adequate. If debt rebalancing is delayed into 2013 or 2014 then QEIII continues to be a possibility.

Industrial metals will not be in high demand during an export led recession since the amount of manufactured goods will either drop or be directed inwards favoring domestic consumption.

Gold will likely bobble up and down with social change and international struggles dependent upon the stability and safety of the residents of the adjusting nations. Essentially gold is escape money used to survive political and social storms when people become refugees and must take their wealth with them. World speculators are driving the price up and show every sign of continuing this manipulation. Government can end gold speculation in a heartbeat if they want to.

Some say this is the right condition for a World War to break out thus causing realignment of world power but I disagree with this since Asia has a largely land-locked military and Europe has no money to mount a world war with.

The U.S. is still reeling from the Bush years of a decade of sustained multiple wars and the associated debt from those wars weighs heavily upon the national psyche. Thus war is not likely and few favor renewed military activity.

America is likely to use this as a period of infrastructure modernization and national improvement and to use the currency flowing into our Treasury to fund our future at very low to no cost.

Only the Republican Party is stopping jobs progress from happening right now and voters are expected to reject Republicans en masse in this November election. I have low confidence in Republicans to manage our economy. Their track record is simply awful.

In this kind of scenario if the QEIII happens, then the money is spent on such things as burying power lines, especially on the east coast, plus putting huge emphasis on ending dependency on foreign oil and creating jobs to spur consumption. Demand will be fed by the Pacific Rim nations. The Smart-Grid will retrofit every home and building in America. Employment followed by a huge choice of cheap goods will follow such a scenario and American quality of life could soar.

Anyhow, these are some of the possible scenarios that lay ahead. I do not think that Americans have to do much but move their capital to safety and be alert to the actual events and what they will lead to. Retirement money must be protected if at all possible and real estate must be protected too since we all need a roof over our heads. I don’t think the real estate market is going to lead much of world economics but rather it will reflect world economics and reflect people’s reduced buying power with price reaction being the consequence.

For much of Europe where real estate markets have been exorbitant we could see significant lowering of building prices. What will be significant is the cost per square foot of new construction versus bargains in existing buildings. For the U.S., I think that the worst of our real estate nightmare is over with although some markets still adjustment.

So we set sail upon an ocean of uncertainty with a government that has done its best to position us for survival in stormy seas. Obama and his team have done their thing, the Republicans are a part of the problem, and Democrats have a clear plan to manage America through rough seas. That is all that we can ask of the Obama team and they have done their job. Now we are poised for others to act and ready for America to react.