In last week's update, I outlined the no-win situation the U.S. economy finds itself in today. I was pleased that so many people sent me comments and questions. Considering how much work I put into these missives, it's great to know people are reading them. And while I can't reply to every message individually, I can attempt to address the most common issues and questions people had.
My basic argument is that the U.S. is becoming a smaller part of the global economy, while the combined emerging markets and resource-rich markets are starting to matter more.
This shift in power and influence carries some dire implications for Americans. For, if the world's economy continues growing, commodity prices will rise to ever higher levels. For obvious reasons, the resource-rich nations will benefit from this trend. Brazil, Canada, Australia (and to some extend Russia and China) will grow rich by supplying commodities to everyone else. Emerging nations too will prosper. Their strong growth will be the driving force behind commodity prices. At the same time, that growth will outpace inflation, enabling them to comfortably pay more for commodities.
Unfortunately, the U.S. is neither emerging nor possesses excess resources. Moreover, the U.S. consumer has been dealt a serious blow in this recession. In the past decade, consumers spent more money than they earned, creating more GDP growth than their GDP contribution. But those days are over, forcing the U.S. to experience much slower growth. Consequently, for Americans, rising commodity prices will not be a sign of expansion but rather a tax that inhibits spending.
Some experts suggest that commodity prices and the growth of the U.S. have a direct correlation. But there are two problems with the idea that one automatically means the other. Over short-term periods commodity prices correlate strongly with world growth, including U.S. growth. Higher production usually raises demand for raw materials. Thus I see that this year stock prices have risen along with commodities. Similarly, brief downturns in commodity prices can occur alongside brief downturns in stocks.
However, over longer periods, the correlation reverses. In fact, looking at data as far back as the 1970s, I can see a negative relationship between commodities and growth. Sharply higher commodity prices can limit growth and rapid growth can bring commodity prices down. I won't go into the math here, but the statistics clearly support this view. (If you want the figures, let me know.)
The other problem with this belief is to regard the U.S. as the top player on the world stage. That's because, until quite recently, it was. For decades, the U.S. economy accounted for over 50% of the global economy.
People's understanding of the world changes much slower than the world itself. So it's no wonder most people still believe that if the U.S. sneezes the world catches a cold (and, vice versa, if the U.S. strikes gold the whole world gets rich).
The world has been changing, however, in ways that few Americans comprehend. China and India combined now account for more of the world’s GDP than does the U.S. (in real terms). Moreover, their growth rates are many times ours, which means that by the time you read this, the difference between China/India and us will be even greater. Throw in Brazil, Russia, and the rest of Asia and you'll discover the U.S. is no longer the economic superpower it once was.
Today, growth in the U.S. can falter without derailing commodity prices (at least not for long). What's more, the longer the developing world keeps its growth rate above ours, the bigger its influence on the world economy will become, and the smaller ours will be. Just as no one worries if a recession in Switzerland will cause the price of cocoa beans to plummet, eventually a recession in the U.S. will have much less of an effect on oil prices.
So the question is -- How do we deal with this brave new world?...Give me your thoughts.
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