When US sneezes

The following is also posted on my blog:


A friend of mine forwarded me a very interesting article by Bob Herbert in The New York Times, titled "An Uneasy Feeling". I think everyone should read it:


The article highlights not a few, but a lot of issues with the economy. It comes in a time when Warren Buffett's Berkshire Hathaway buys Northern Santa Fe Corp for USD 26 billion and WB is quoted as saying "It's an all-in wager on the economic future of the United States".

WB may have placed his bet. However, for the rest of the world, the realities are not conducive for a wager as yet, not on USA and not on any other country either.

The emerging markets phenomenon is currently shining like pyrotechnics. Stock markets have given gains in excess of 50% and we are hoping that they will pull the world out of the financial crisis. The statement may be true, but the world must not forget that it is important to have recovery in the USA also, and this recovery needs to be for the middle class, and not merely for WB and the likes.

At present, USA is still approx. 20% (USD 14 trillion) of world’s economy (USD 70 trillion, Gross domestic product based on purchasing-power-parity, as per IMF http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx ). China comes closest with 12% (USD 8.7 trillion). Other key emerging countries are: India 5% (USD 4.5 trillion), Russia 3% (USD 2 trillion) and Brazil 2.8% (USD 2 trillion). In speedometer terms, apart from China, and probably India, at global level, growth in rest of the emerging markets hardly move the needle of economic growth. (For reference purposes, UK is 3% - USD 2 trillion).

In case of China, GDP growth is mostly export let, and significant amount of its exports are to the USA. Most of its surplus ends up being invested into US treasury bonds i.e. it lends heavily to the US government. The US government channels this money back into the US economy (and various wars across the globe). As the US economy produces very less of its needs, it ends up importing from China again, plus it also ends up paying interest on bonds. Apparently, this is a cycle that runs in perpetuity:

-    Americans not only end up buying Chinese goods, but also paying interest to China through their tax payments.
-    China reinvests its export earnings into US government securities.

The same story is repeated in the petroleum cycle and probably the IT cycle (Refer http://www.treas.gov/tic/mfh.txt for listing of holders of US treasury securities).


The cycle is creating a bubble and is working like a ponzi scheme and the risk is that if and when US will sneeze, the repercussion will not merely be the world catching common cold. The second risk that that the world will not reach the point of catching a cold (or in other words, the point of bursting of the bubble), as the US government will keep us all busy with wars and propaganda while media will keep us distracted with non issues like the Tiger Woods case or renaming of Burj Dubai as Burj Khalifa.

From my perspective, I truly hope that we see a revival in the true economy of USA.

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  • Thanks Nouman.  As you know from a previous post I am right with you on your analysis.  The unhealthy East-West imbalances that underlay the crisis have not been tackled or corrected in any way by the policy response.  The fact we have any kind of recovery now should not be taken as a sign that all is well or that the policies of super low interest rates, quantitative easing, government support of the financial and other sectors and fiscal stimulus have "worked".  In fact they are a big gamble.  When these short term, artificial and unsustainable supports are taken away (this process is starting in the UK with the withdrawal of the VAT cut) we need to see a big, real upswing in private sector activity - crucially employment - not only to take the place of stimulus but to enable the public sector deficits run up during the crisis to be repaid.  This is by no means assured.
    My last blog post relates to this crisis theme - a short item on the problems of the Spanish pig farming industry and how they perfectly illustrate the "Austrian" interpretation of the cause of the crisis which is mostly ignored by policy makers:

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