AMERICAN NOTES
Tim Wood
The US economy is like a Formula 1 grand prix with many spectators attending only in the hope of seeing accidents. They’ve been given a spectacular pile-up after the technology bubble popped and yet they’re desperate for more; something fatal.
The morbid obsession to lay the United States low rises and falls in proportion to its success. Right now it has set new standards for being a global superpower so the enmity is also at a peak. Anti-globalisation protests, focused as they are on US companies and politicians, are the most visible and easily disregarded, but it is curious when investors also wish the country ill.
For the professional bears that make money when assets and securities fall in value the logic is sound. But there are few such investors. Most investors are naturally optimistic and manage their pension funds, unit trusts and savings accounts according to growth scenarios. Yet by looking forward to the US spinning out they undermine that optimism.
The world is interlinked in ways that make the old clich “when the US sneezes the world catches a cold” truer than ever. The transmission of conditions affecting the US economy now occurs at a sectoral level and brushes past national or regional economic fundamentals without any resistance.
Take the debt and inventory crisis in telecoms. What started as a US problem among equipment manufacturers was soon exposed as the early warning signal for troubled network operators and handset makers in Canada, Europe, South Korea, Taiwan, Australia and Japan. It is a repeat performance of late 1990s overcapacity in the car industry that rippled through every country that manufactured vehicles and which still weighs over the market.
When it became apparent late last year that the US might fall into recession, Europe assumed that it could inherit the growth mantle. Most indicators pointed that way and it was widely assumed that the euro would begin to appreciate in value as investors ditched dollar denominated securities. European politicians were positively gleeful.
The opposite is occurring and Europe now faces a greater threat of stagflation rising inflation with slow or no growth than the US does. Interest rates are higher than they should be because of inflation from rising oil prices and the chronically weak euro (down 27% since its introduction). But then it speaks to Europe’s mindset that it is more worried about inflation than slow growth.
America’s increasing dependence on foreign energy has heightened the fear of inflation and made it a global problem. The Organisation of Petroleum Exporting Countries has leveraged the US’s vulnerability to triple crude oil prices transmitting inflation throughout the world and tightening the screws on net oil-consuming countries. In the European case it shows just how ineffective the Central Bank has been in maintaining the European Union’s supposed isolation from US economic impacts.
Likewise, Asia’s steady recovery after the 1997-1998 crises has been put off by the slowing US economy. Most Asian countries are heavily export-dependent so even a modest reduction in American demand has a tremendous impact on their overall economies.
Given the strong integration of technology innovation and manufacturing in the US and Asia respectively, it was inevitable that the end of the high-tech bubble would have severe consequences. Throw in Japan’s decade-long slumber and that region has little to look forward to without the US getting revved up again.
For Africa the situation is even more desperate. It only caught the crumbs of the technology investment boom, but it will have to carry an outsize share of the slowdown because it is still so dependent on the export of primary goods. It is bad enough that hard and soft commodity prices have been deflating for so long, but the combination with declining demand is lethal.
The world may not be overly fond of America the superpower, but it cannot untie the wealth linkages. Everyone has a stake in the US economy and talking it down is entirely self-defeating. That next high-speed wipe-out might take place right in your grandstand.