Several important economic factors appear to be moving unfavorably for the US at the moment, both domestically and abroad, and there are increasing indications that America may not be able to orchestrate a hoped-for global resurgence on its own. Despite encouraging signs of domestic recovery, fundamental structural problems persist in the US economy. The National Debt now exceeds $18 Trillion, the Department of Agriculture confirms that well over 46 million Americans continue on food stamps, and key voices have stepped forward asking for a deeper look at several U.S. economic statistics. In February, long-time Gallup CEO Jim Clinton very boldly drew attention to the government’s recent 5.6% unemployment numbers, questioning them as overly optimistic interpretations of data, and noting on CNBC that the percentage of Americans holding full-time jobs is now the lowest in 60 years. Former US Asst. Treasury Secretary Dr. Paul Craig Roberts added more to the unemployment conversation recently when he calculated that the true US jobless rate may reach nearly 23% after adding back several categories of workers who have now given up looking for work. Several other media sources including CBS Radio have reported that as many as a record 92 million Americans may now be now functionally unemployed.
Adding to the domestic uncertainty, more pressing issues loom for the US internationally. While the dollar is currently surging in value as a ‘safe haven’ investment, America faces more than the usual normal number of unsettling issues abroad. From China to Russia to India to Ukraine to Switzerland to Greece to Iran to Saudi Arabia and the Middle East, the US may be facing potential developments with both allies and adversaries which could displace the US from its lead role in international finance. The dollar has ruled supreme internationally as the global-standard currency for settlement of most international payments since the 1944 Bretton Woods global economic summit. But the handwriting is on the wall for a change ahead, especially when considering the emergence of Russia, India, China and the other BRICS bloc of countries. We should make no mistake about it, the BRICS countries and many other long-time allies and friends no longer view the US as unwaveringly as they once did. IMF Managing Director Christine Lagarde has since 2012 noted several emerging ‘tectonic shifts’ in global finance. Much groundwork has been laid in recent years by the BRICS toward a ‘tectonic’ realignment of the global currency markets and to de-emphasize the dollar as the global currency of choice, especially including settlements for oil. The US has steadily resisted this shift for decades, because allowing the world to bypass the dollar could have profound implications for US influence in the world, as well as in the daily lives of Americans as the cost of imported goods rises.
What are these emerging ‘tectonic’ developments and where are the current focal points which might result in a global currency realignment and a shift in the dollar’s role? Here are a few of the more notable global shifts as the US might see them:
Mathematically, the odds are very strong that a global realignment of the dollar, euro and yuan and their relative weighting and exchange rates will occur, and possibly soon. Why? Because despite the brave declarations of economic recovery from global leaders, each of them has very capable advisors who understand the reality that the entire planet is daily sinking deeper into depression. The Baltic Dry Index, long noted as a reliable surrogate statistic for the volume of global shipping trade, has reached an all-time low in February 2015. It is increasingly possible that the passage of time plus continued money printing from central banks may no longer produce reliable global economic growth.
With the vaunted Chinese economy weakening to its slowest growth rate in 24 years, with Japan (the world’s #3 economy) now shrinking at 1.2% per year, with Russia now contracting 10% or more under new economic sanctions, with Europe approaching zero growth and in steep recession, and with oil and many global commodity prices recently in free-fall, the U.S. and its targeted 3.5% growth rate for 2015 are being touted yet again as the growth engine for the world. As we look at numerous negative revisions from the BLS, Commerce Department and others regarding broad economic activity, employment rates, durable goods orders, and housing, the repeat image of the ‘US as Economic Locomotive to the World’ might be a little more far-fetched this time around. The problem is global, and the US is huffing and puffing but maybe no longer powerful enough to pull a growth train of debt-laden railcars, with some of them now moving in reverse. As Canadian Finance Minister Joe Oliver recently noted, the US ability to carry the world economy “is simply not sustainable.” Even U.S. Treasury Secretary Jack Lew supported the concerns himself, noting in February “The rest of the world cannot depend on the United States to be the sole engine of growth.”
Global growth has always been the answer to the debt problem, but the idea of more and more money-printing bailouts to ‘buy time’ for the world economy to heal may have been an overworked solution for many years now. As former PIMCO Co-Founder Bill Gross (now with Janus Capital) wrote in his January Investment Outlook:
“The power of additional and cheaper credit to add to economic growth and financial asset bull markets has been underappreciated by investors since 1981…There comes a time, however, when zero-based, and in some cases negative yields, fail to generate sufficient economic growth… The good times are over….The time for risk-taking has passed.”
The European Union Times recently quoted the McKinsey Global Infrastructure Report in noting that global debt has grown by 40% from $142 Trillion in 2007 to $199 Trillion in 2014. But global economic growth has not kept pace, indicating that the higher debt levels will be even harder to service. While additional trillions in bailouts, global central bank money-printing and QE announcements still offer very welcome news headlines to markets in the short term, perhaps the smart money now acknowledges that target 3.5% US growth forecasts may not come even close to providing the ‘escape velocity’ to overcome this added debt load, or to pull the global economy out of the looming debt problems and core mathematics.
Can lower crude oil prices provide the missing global growth stimulus? Undoubtedly, the broad stimulus of the recent 50-60% decline in global crude prices over the last 8 months will provide both relief and a small boost to the common man at the gas pump, but the losers on the other side of the oil price equation are powerful companies, banks and countries which have a tighter economic nexus. Their concentrated losses could have a more impactful and disproportionately large effect on global markets, especially in the financial derivatives area, as compared to the more widely-scattered gains of the average man in the street. We will see. The quadrillion dollar derivatives market has yet to be fully understood by many.
But lastly, what again about the recent ‘good news’ of the steadily surging dollar? There seems to be little real relief there either, as the other side of the stronger dollar is that it makes precious US exports more expensive and thus less competitive in global markets. As Caterpillar CEO Doug Oberhelman carefully noted recently: “The rising dollar will not be good for U.S. manufacturing or the U.S. economy.” Following the February G-20 meeting in Turkey, perhaps the world’s leaders will look to other economic engines and other solutions.
Doug Johnston is an expert witness and investigative business consultant specializing in Commercial Banking & Lending, Private Equity, and International Banking. Early in his career he was named as the youngest bank president in Texas, and thereafter he established multiple bank offices in California and Texas. Expanding into Corporate Finance and Mergers & Acquisitions, he became a ‘Founding Father’ of the largest private company in Los Angeles. As a C-Level executive, he has ‘hands-on’ debt and equity finance and documentation experience with lenders and investors involving hundreds of companies engaged in technology, service, real estate, manufacturing, and entertainment across the US as well as in Europe.