When there is a loss of confidence in financial assets, investors around the world sell them at the same time, which results in a financial crisis. These assets will, of course, be worth a fraction of what they were before the crisis. Financial institutions that own these assets may not have enough money to cover them. This causes financial institutions to reign in lending because individuals have little or no liquidity; without available credit, the economy contracts.
This is how a financial crisis translates into an economic contraction. This is why governments step in to provide liquidity to the banks (quantitative easing) in order to keep the economy from further contracting on itself. A financial crisis can bring an economy to its knees. The government’s job is to mitigate a loss of confidence in the first place, because this is what triggers a financial crisis.
One of the questions being asked by investors these days is “where’s the inflation?” After the financial crisis and the fall of Lehman Brothers, the Federal Reserve and the U.S. government stepped in to help the financial system. As a result, they promised to print money, and thus quantitative easing was born. Banks received billions of dollars in bailout money.
With this, there was a significant amount of speculation that the increased money supply in the U.S. economy would lead to a period of out-of-control inflation, or hyperinflation.
Fast-forwarding to now, it’s been more than five years since the collapse of Lehman Brothers, but out-of-control inflation has yet to occur. Were those who said there will be hyperinflation wrong? What’s the inflation situation right now?
In August, the Bureau of Labor Statistics reported that the prices in the U.S. economy increased by 0.1%. From January to August, prices increased in the U.S. economy by only one percent. (Source: “Consumer Price Index – All Urban Consumers,” Bureau of Labor Statistics web site, last accessed October 29, 2013.)
Other indicators of inflation ahead signal it’s going to remain dismal as well. For example, I look at the producer price index (PPI) as one of the key indicators of inflation.
In September, the PPI showed that producers in the U.S. economy experienced a deflation of 0.1%. Since the beginning of the year, the inflation in producer prices has only increased by 1.1%. (Source: “Producer Price Index-Commodities,” Bureau of Labor Statistics web site, last accessed October 29, 2013.)
With all this in mind, I stand little different from those who say there will be … Read More
As the U.S. government shutdown was prolonged, not only was there noise about getting away from the U.S. dollar, but also about what happens to the U.S. economy next. On one hand, there was a consensus that the U.S. government shutdown was actually a good thing, serving as a cost-cutting measure that allowed the government to save money. On the other hand, there were those who said it was impacting the U.S. economy’s recovery process and would wipe a certain percentage off the U.S. economy’s gross domestic product (GDP).
Both sides had a solid argument to prove their point about the impact of the U.S. government shutdown on the U.S. economy, but my stance differs from that of both groups. Before going into the details, be aware that we don’t know the exact impact of the shutdown just yet, because the economic data has not been released, but time will eventually draw a better picture.
So what’s my take on the U.S. government shutdown that happened for 16 days? Forget the shutdown; it didn’t matter. What I am concerned about is the other dismal trends that continue to remain in the U.S. economy. If they are not fixed or their direction doesn’t change, then economic growth in the U.S. economy becomes very doubtful.
One of the trends I have been closely following is the unemployment in the U.S. economy. I agree that the number on the surface, the unemployment rate, looks much better than what it was during the financial crisis. However, when I assess and analyze the details, it’s not looking very good.
What you want to see are … Read More
As Congress has come to a decision about the debt ceiling and kicked the can a few months down the road, I hear a significant amount of noise about the U.S. dollar losing its reserve currency status.
With this, I ask: could this really happen anytime soon?
Before coming to any conclusions, let’s dive into the basics. A reserve currency is the currency that is commonly used in the global economy; central banks keep it in their foreign exchange reserves and businesses do international transactions with it. One of the other characteristics of the reserve currency is that it is thought to be able to remain strong and stable over time. Currently, the U.S. dollar holds reserve currency status.
So what’s next?
You see, over the past few years, and especially since the financial crisis, the fundamentals of the U.S. dollar have gone downhill. The U.S. dollar is losing its stability and strength; for example, look at the long-term chart below of the U.S. dollar compared to other currencies in the global economy. You will see there’s a clear downtrend.
Chart courtesy of www.StockCharts.com
But this is just the picture of what has happened in the past. Going forward, the fundamentals are deteriorating further, and the speed at which it’s happening is picking up the pace as well.
To begin with, we have increasing national debt. It’s not very commonly said in the mainstream, but the U.S. government has the most debt, in nominal terms, than any other country in the global economy. And after Congress came to a consensus, it pretty much promised it would increase further—we will probably … Read More
The global economy looks to be in trouble, with the problems brewing quickly. Major economic hubs in the global economy are struggling for growth, but are failing—a fact that is largely ignored by the mainstream.
Long-term investors need to know that an economic slowdown in the global economy can deeply affect the key stock indices here in the U.S. economy. The reason for this is very simple: American-based companies operate throughout the global economy. As a matter of fact, in 2012, for the S&P 500 companies that provide data about sales in the global economy, 46.6% of all sales came from outside of the U.S. (Source: “S&P 500 2012: Global Sales – Year In Review,” S&P Dow Jones Indices web site, August 2013.)
Clearly, if there is an economic slowdown, the demand will decrease and the U.S.-based companies will sell less and earn less profit. As a result, their stock prices will decline.
So what is really happening?
In the beginning of the year, there was a significant amount of noise about how the global economy will experience growth. This did not happen.
The International Monetary Fund (IMF) expects the global economy to grow by 2.9% this year after seeing growth of 3.9% in 2011 and 3.2% in 2012. In 2014, the IMF expects the global economy to increase by 3.6%. (Source: Duttagupta, R. and Helbling, T., “Global Growth Patterns Shifting, Says IMF WEO,” International Monetary Fund web site, October 8, 2013.) Mind you, these estimates were much higher in July, but they have since been revised lower.
We all know how anemic the rate of growth of the U.S. … Read More