The Shrinking US Economy:How Much Will It Shrink?
The past week has shown that the subprime credit mortgage crisis in the US has metastasized into something bigger, and is spreading into other parts of the economy, and is now beginning to affect bond markets in the US. This is a worst-case scenario gradually unfolding before our eyes, and the Fed under Bernanke and the politicians seem unable to do anything to stop it, which is why they talk so little about it.
The issue made me think about something. Several years ago, a report was issued (I believe it was Goldman Sachs), which said that the Chinese economy would become the same size as the US economy by 2040 based on current trends. The key term here is “based on current trends”, something which almost never happens, as things almost never continue smoothly in politics and economics.
The present crisis in the US is causing what I call a double shrinkage. The size of the economy is shrinking as highly-leveraged credit derivatives are slowly worked out of the system. As these derivatives, which were as good as cash just two years ago, creating more money in the system than the Fed are worked out of the economy, the GDP of the US economy will shrink. It is not a question of whether it will shrink, it’s just a question of how much. That is something the market, the politicians and policy-makers are figuring out.
But it does not shrink just on the GDP level, it also shrinks on the US dollar level, which has been losing value steadily, and will likely continue to lose value as US interest levels fall. (The problem for the Fed is that although interest rates have fallen, US banks have tightened up their lending qualifications.) This means that US goods will become cheaper, and more foreigners will go to the US to buy real assets.
Roger Ehrenberg has written an excellent article about what US headlines will look like over the next 2-3 years on his Information Arbitrage blog. No wonder that even companies like Apple are looking overseas for sales growth in the face of slow growth in the US market.
This takes me back to the report which talked about China overtaking the US economy by 2040. The report did not take into account the shrinking of the US economy on both the GDP and currency levels. If the Chinese economy continues to grow and the US economy shrinks, isn’t it likely that the Chinese economy will overtake the US economy much sooner than 2040?
Of course, there are a lot of variables. Can China continue to grow at a brisk pace without a healthy US consumer economy buying Chinese exports? And what can the Chinese government do to curb inflation, which is growing faster than in the past 15 years?
We will find out…eventually.
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Tags: • Apple • bonds • credit • derivatives • economy • GDP • informationarbitrage • mortgage • subprimemortgage • US
Credit Crunch » The Shrinking US Economy:How Much Will It Shrink? said,
March 9, 2008 @ 3:07 am
[...] Investment Blogs wrote an interesting post today onHere’s a quick excerpt The past week has shown that the subprime credit mortgage crisis in the US has metastasized into something bigger, and is spreading into other parts of the economy, and is now beginning to affect bond markets in the US. This is a worst-case scenario gradually unfolding before our eyes, and the Fed under Bernanke and the politicians seem unable to do anything to stop it, which is why they talk so little about it. The issue made me think about something. Several years ago, a report was issued ( [...]
Temporary Test Blog » Blog Archive » The Shrinking US Economy:How Much Will It Shrink? said,
March 9, 2008 @ 3:34 am
[...] Original post by admin [...]
Loan Mortgage Calculator » The Shrinking US Economy:How Much Will It Shrink? said,
March 9, 2008 @ 4:28 am
[...] jiHymasnH(The travail for the FRS is that though welfare rates impact fallen, US banks impact tightened up their effort qualifications.) This effort that US whole power improve cheaper, and more foreigners power go to the US to take actualised assets. … [...]
Andron said,
March 10, 2008 @ 11:08 am
Excellent article. I’m looking at some of these stuff for my website right now.
trevelyan said,
March 11, 2008 @ 3:34 am
>As these derivatives, which were as good as cash just two years ago,
> creating more money in the system than the Fed are worked out of
> the economy, the GDP of the US economy will shrink.
Disagree. The Fed is doing the only thing it can to prevent the US from falling into a liquidity trap. This is keeping the monetary base stable at the expense of impressive inflation (commodity markets are already swamped). Unless some major banks start failing US GDP shouldn’t shrink significantly, although it will probably grow slower than population growth. What we’re getting instead is the appreciation of pretty much every currency against the USD and rapid “GDP catch-up” by countries just because of changes in the value of the USD.
I’ve been hearing from some friends who work quant that they’re predicting the USD will stabilize at 6:1, but when I press them for numbers they’re evasive, and I get the feeling that a lot of these predictions are mostly guesswork (pick a low figure, and far enough away that estimates can be revised as appropriate) than actual substantive calculations, even back-of-the-envelope ones.
Until the US gets its fiscal policy and trade deficit under control I can’t see much cause for long-term reversal. And it’s a major political problem. I’m hearing a lot of Democrats complain about how Clinton’s economic policies in the late 1990s “enabled Bush”, which suggests that the mood is turning ugly. If the Democrats stop being the party of fiscal sanity the whole country will probably end up in a handbasket.
neil signo said,
April 2, 2008 @ 4:52 pm
Big Fat Joke!
The USA economy when measured correctly will tell you the same as in China.
Since the beginning, small companies, farms were in large numbers. These small companies to reach other areas about 40 miles, a 1 hour drive to every customer. The business of re-label, and OEM was created for technology companies as large as Ford, Sanyoung, Motorola, … In the area of clothing and food there is the legendary McDonalds, Pink’s Los Angeles, Marriot, Hyatt, Wendys’, Pepsi, and Coca-cola. Even Dole and Del Monte.
These financial anaylsts are walking on ‘dreams’ most companies in the USA are small, the person just cant drive 1 hour to get food, office supplies, and it cost too much to deliver.