One of the oldest economic sayings is: “when America catches a cold, the world gets pneumonia.” Like all sayings it has a flip side: “when America takes economic medicine, the world gets an overdose.” The medicine that America has been taking is cheap money and that had been flooding into the world. What ails the US is not being addressed, but the effects of the disease are being alleviated by the production of huge amounts of cash.
Cash is called liquidity these days. You might suspect that creating liquidity feels better than printing money, in the same way ‘a man walked into the bank and robustly requested liquidity,’ sounds better than: ‘a robber went into a bank, stuck up the teller and demanded a bag full of $100 bills.’
The underlying problem of the US, and for that matter most of Europe, is a huge balance of trade deficit pumping the wealth of the developed world into the accounts of the developing world. All the QE you see is to paper over the chasm of a trillion-dollar-a-year trade deficit that drains wealth out of the US into the developed world. QE is a debasement to shift that wealth back via what amounts to a dilution of the value of dollars outside the US.
The trouble is, while the focus is on low interest rates and restarting internal growth, the focus doesn’t sit squarely on rebalancing the core trade imbalances that mean the developed world is getting poorer at about $100 billion a month. This new US liquidity had been flying out of the door straight into the arms of the developing world but as the flood of money is being stemmed so are the good times for emerging economies. Without the spill over of oceans of cash from the US, hard economic times are returning, but the economic growth targeted at home is starting to ignite good times back in the US and its European proxy the UK.
Meanwhile back in Europe, the financial might of Germany is at the helm. It is not a deficit nation and it does not like driving growth through debasement. However, while it effectively leads financial policy in Europe, its partners are not so austere and they have been twisting Germany’s arm to get the printing presses rolling. They have slowly but surely loosened the purse strings. This will see the Euro fall to pre-crash levels and there will be a rally in the general European economy.
While new style inflation is low in Europe, old-fashioned inflation is rampant. A 1970s style basket of goods has rocketed in price, which in general is what the poor spend their money on. As flat screen TVs and mobiles supress the headline figures, hard assets have been bubbling up in cost.
So far, the developed world has got away with this sleight of hand so the engine of good times can be supported politically because for now, at least, no one is pointing out that the essentials of life have been spiralling up in cost and that workers need more money to keep up. As such, a 70s style meltdown has been avoided for now.
So in effect, the world is flipping from boom in the developing world to bust. As this is the key economic pivot the developed world is rising from bust to boom and as the old world rises it will exert a bearish pressure on the developing world.
However, the giant transfer of wealth from America and to a lesser extent Europe will continue, closing the gap at a fundamental level one trade imbalance at a time. This is probably a good thing for the poor of the world, even if it comes at the cost of the living standards of the working class of the west. As the west enjoys a period of better economic conditions, no one is even going to bother addressing the underlying problems of the west. They run deep.
This may be good news for the world but on an individual level the consequence may prove disastrous. As any pensioner relying on bonds is no doubt already finding, the result of the macro policies of the west leads them to a poorer and more worrisome future than they planned for.
A rally in the developed world’s economy in the coming few years will not necessarily pan out for you the individual. As such, the big picture is key for those wanting to do well from the good news while avoiding the downside of the long-term developments that are on their way.
The juggernaut of economics does not care about the individual and as such we all need to keep a wary eye on it.
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