Wednesday, September 22, 2010

It's a race to the bottom right now




Countries everywhere have abandoned strategies to boost domestic spending because of real or perceived debt fears. Instead, growth policies have all become focused on exports. Whether you are talking about Europe, the U.S. Japan or China it's all about exports. The problem is, there's no one to sell to. In the past the United States was the buyer and because of this it was seen as the engine of global growth. But now the Obama Administration is looking to double exports in the next 5 years. How is that achieved? Currency devaluation and wage and income suppression. That's the problem, all the major countries are looking to boost growth the same way. It can't happen. That's why we're probably close to another leg down in the global economy or some kind of currency crisis.

Under this scenario it looks like the euro has the most to lose.

5 comments:

Tom Hickey said...

Mike: That's why we're probably close to another leg down in the global economy or some kind of currency crisis.

Agreed. In addition, I am concerned about the global politics of beggar thy neighbor, in particular the potential ugly face off of the US and China.

Under this scenario it looks like the euro has the most to lose.

I don't expect the euro to survive as stateless money. The EMU was ill-conceived and it will take down the EZ, the asymmetry being too great to overcome. I think it will be Germany that pulls out and goes back to the DM, while also attempting to convert the outstanding loans held by its banks to DM. Could get ugly politically there, too.

We could be heading into rocky times globally as ill-advised austerity bites.

john lutz said...

short the Euro?
or . . .?

john lutz said...

short the Euro?
or . . .?

Tom Hickey said...

I would hesitate to short the euro at this point. The Europeanists are going to pull out all stops to preserve the euro, since a failure of the euro would end hopes of a European union. I think that the ECB will do all it can to prop up a deteriorating situation, but that Germany will balk in the end.

So I would wait for the situation to ripen before shorting the euro. In fact, in the interim the euro could strengthen. But in the end, austerity is not going to work and the periphery is not going to be able to export out of this. That will eventually result in social unrest along with the banks having to take their lumps.

At that point, governments will have to fall back on monetary sovereignty to survive, and means leaving the EMU. Eventually, this will affect Germany and France since their banks are heavily in this. I suspect that Germany will recognize the inevitability of this before others throw in the towel, and it will act first in order to be in a position of strength, instead of waiting for the weak countries to defect and default. Germany will likely try to negotiate transferring the outstanding loans to the new DM.

How long this will take to unfold is anyone's guess, but I cannot see how the EMU can work in the long run. They just did not think this through at the outset, and now the internal contradictions are becoming clear. The markets will, of course, test this weakness. as markets are wont to do.

TomatoBasil said...

Trade can never provide a positive contribution to GDP without "racing to the bottom?" I'm talking about trade in financial terms as a component of GDP, (not the real terms of trade).
When jobs are the bottleneck in the economy, importing a bunch of labor from abroad tends to bristle the unemployed. Obama's currency rhetoric could end up causing a Smoot–Hawley type fallout. Why can't they talk about creating jobs. Jobs Jobs Jobs. Enough of the high minded economic concepts by idiot politicians already.