Wednesday, June 10, 2009
My email to Warren Mosler, detailing my macro outlook
The good news is the deficit has already boosted non-governmentals savings to a record, $620 billion and that is only likely to grow larger by the time their spending reductions turn that trend. And of course, I = S, so we're in good shape for now.
Your original advice to me, when we had dinner in New York was, "Buy S&P futures and go play golf for a year." That was probably correct. I followed it. (Unfortunately, not in the size that I would have liked because of limited funds, but better than nothing. And, oh yeah, I am not a golfer, so I'm doing other things to keep me from watching stocks!)
Where I think you are wrong is China. I see China as having no choice in the matter. Even if they secretly desire to sustain exports they will have to relinquish this policy because it clashes with U.S. goals that now appear to be set in stone. It is becoming increasingly clear that the U.S. will not support a long-term commitment to sustaining output and employment if it means enlarging the "twin deficits." Moreover, policymakers on both sides of the aisle here in the States are terrified of the (inapplicable) fear that China will not keep buying our debt. They are also terrified of (clueless) rating agencies downgrading our AAA credit rating.
As such, there is a major long-term shift underway as I see it, where the U.S. comes to rely more heavily on an export-driven, "fiscally responsible" course that, by design, keeps income down and comparative advantage up (via a weaker currency vis-a-vis the renminbi at least). The Chinese will see a gradual, yet sustained erosion in exports to the America and, therefore, will be forced to rely on greater levels of domestic investment to support demand and employment whether they like it or now.
We are, in essence, handing them the mantle of global economic leadership because of our out-of-paradigm and destructive belief system. This is terrible for the citizens of this country and de-facto passes along to future generations of this nation a lower standard of living. But smart investors can "hedge" by investing in China now. China is where the U.S. was at the end of WWII, which means that fortunes will be made by those who buy and hold in what will be, as Boone Pickens likes to say, "the greatest transfer of wealth in the history of the world." (But he says it for the wrong reason!)
Other than that, everything's hunky dory!