As with anything in economic forecasting, what I am about to say is at best an educated guess.? Given the present environment, where is the global economy likely to go?
Any analysis like this has to contend with political factors that drive the major imbalances of the global economy.? Here are the imbalances as I see them:
- China insists on keeping its currency cheap in order to promote employment at home.
- The US does not care about deficits or currency debasement, as it seeks Keynesian remedies to its economic crises.? (Little realizing that they are making things worse…)
- The Eurozone protects profligate euro-fringe nations, at the possible cost of destroying the Eurozone as a whole.
If China will not allow its currency to strengthen, well then, the path of least resistance is for the US to debase its currency, leading the world in a cycle of competitive debasement/inflation.? Since many nations want to be net exporters, US Dollar weakness is responded to through debasement, or purchase of US Dollar assets.
Putting it simply, the path of least resistance is inflation.? Reduce the value of nominal debts in real terms.? Eliminate underwater debts by raising the nominal prices of the collateral.
Now, surplus nations like China and Germany will resist this, but I suspect they will be dragged to this, kicking and screaming.
We are in the process of trying the alternative approach to solving the Great Depression via inflation, which will have a different set of problems than the foolishness of FDR.? The problem is too much debt, which needs to be changed into equity, but government tinkering discourages compromises.
Rather than the deflation that characterized the Great Depression, inflation may be what drives the future.? The question could be “how much?”
But all that said, there are other possibilities.? We could raise taxes and pay off the debt.? We could default on the debt.? Neither of these are favored by current politics, but they could happen.
So as you invest, consider an inflationary bias.? I think it is the likely wave of the future.
Mr. Merkel:
Is there a free source for industry/sector index price data that I can regress onto inflation to see which industries perform well in inflationary periods?
Is this relationship likely to change in an environment where consumers are deleveraging for the first time in a highly inflationary period (i.e., consumers are strapped and the industries that have been able to pass on input costs in the past may be unable to continue to do so in the future)?
The gut instinct here (for me) is to invest in petroleum exploration and production companies and other natural resource P&E companies. What about utilities? Can we still play the medical device manufacturers on the back of an aging population, or is it too well priced in?
I look at inflation differently than the Federal Reserve does. They look at consumer prices; I look at asset prices. If they try to create inflation, they will succeed in creating inflation… somewhere. In the 1990s, there was low consumer price inflation, but high inflation in equity prices and health care costs. In the 2000s, there was high inflation in non-agricultural commodities, home prices, and health care.
If they attempt to create in inflation this time, they could fail to inflate the negative equity target assets and, instead, push inflation into an unintended asset class (equities again?). I guess that the point I am trying to make is that past relationships might now hold and it may be difficult to see which asset class(es) get inflation until the move is well into its run.
David:
Your forecast/summary is same as Yves’, describing conditions in more or less the same way.
Couldn’t disagree w/you more.
I will say, however, that to describe (as Yves and so many others… seems to me a group-think mentality that comes from finance circles) these global economic activities/relationships solely in currency valuations, w/out considering underlying econ activity… it’s a fools game: bass-ackwards.
I can’t help but wonder if this post of yours was response to my screeds of previous days? What you say seems an entire (generally) refutation. To me, your conclusions are a disappointment.
Given what’s going on (and NOT) on our shores, we do not have economic activity supporting public’s perceived standard of living or wealth. And it’s eroding daily.
You even suggest default… I see that a lot in “informed” conservative writings.
You (and most of others I read offering similar forecasts) do not seem to comprehend the degree to which US influence in global economic matters has waned. We certainly could default. But recovery for the consequences of that would require other things I’ve been harping about, actions which are not on the horizon.
If you want to solidify the debasement of $USD’s value internationally, then sure… default.
Makes me wonder though, there were no complaints when it was written often that China’s TREASURY purchases were financing our Iraq adventure while riding a housing bubble… that was ok then.
But now… I dun’o David.
Our problems are fundamental. The layers of publicly believed lies are fools gold. We’re steering our ship by twisting the rear view mirror, being told that will somehow change directions.
Hoping for solutions based on currency shenanigans is more of the same: none of this addresses human economic activities in the US.
Ok, I won’t bother you guys here anymore. No need to ban me.
Best wishes.
David,
Do you see wage inflation on the horizon? If so, how does it play out? Without that happening, I just cannot see inflation gaining any momentum.
From Bloomberg, by John Hathaway on Thurs:
Couldn’t agree more w/most of that… particularly “repetition of conventional wisdom”. And that “wisdom” (poor choice of words IMO: habit would be better) part is not reserved to FED/TREASURY: it’s systemic, extending in saturating fashion into private sector.
I am fairly certain the end game here is a higher Chinese and other emerging economy currencies. It pretty much has to be that way. The standard of living will go up in these countries and reduce in the US. As it is hard for people to see their standard of living reduced in nominal terms, inflation is a much easier answer.
Many of the world’s currencies are fine. the Euro is high, but it is really at the top of a wide range is seems to swing between against the US$. the “commodity” currencies (Canada, Australia, etc.) are high, but this is no different than when the US$ was high during the high tech bubble.
I think the big issue is how much pain we will have to go through to get there. If China would let market forces provide more determination of the value of their currency, we’d get there a lot quicker.