March 14th, 2009

Very often when I read about the prospects of the US economy, it seems to be from the perspective of a debtor that can't repay his debts, and therefore must fail. Otherwise the perspective is one where the analyst pretends that the debt-situation is not that bad. Well, the debt-levels are bad (just look at these graphs!) and the derivatives market with its huge uncertainties along with constant government bailouts is not exactly making things better. I've heard estimates for total derivatives losses from only a few billion (in the very beginning) up to over hundreds of trillions of dollars. Whatever the total losses will be, we basically have two scenarios of how it will end; either the losses stop coming fairly soon or the government is going to keep bailing out the banks and eventually the bailouts will have become so many that everyone is going to start asking questions and then we'll have a great public indignation which would force the government to declare an end to bailouts and let the banks and the financial system finally crash, or the government will have to somehow quench the uproar. The bailout and stimulus-packages already in place and the potential coming ones are going to be funded by monetization, cause there's no way that the rest of the world will lend those kind of sums of money; this will inevitably devalue the dollar, which brings us to the lenders...
For the last couple of years (decades really) all they've done is to accumulate IOU's like crazy, when the reasonable thing would have been to spend those IOU's in exchange for things from the US. Now they're sitting on these huge mountains of IOU's and they're getting worried because of the bail-outs and the possible devaluation of the IOU's (or: the dollar). What would be the reasonable thing to do here? Would you throw the dollars away, keep sitting on them or would you start giving them back to the debtor in exchange for something useful?
I think the answer is pretty obvious. The countries that have huge holdings of dollars will have to start spending them, and this can only mean that a lot of business is coming to American companies. If you look at the trend, it tells you that more and more dollars are pouring back into American companies. Take GE for example, they're sucking up five billion dollars a year from China today and that number is growing. It's all very simple: If the foreigners don't spend these dollars, they're just getting into more trouble - as will the American people because they will have to default, and/or inflate away parts of the debt.

So, does this all mean that things will be honky dory? Well, one should definitely not disregard the huge importance that the US consumers have for American companies, and to rebuild wealth will take some time. It really depends on how stupid the lenders and the US government are, if the lenders start spending dollars then the rebuilding of wealth (or destruction of debt) will go a lot faster and things may well stabilize (stop going down) within two years - this assuming that the derivatives market will have stopped imploding (!) - and that really is the huge wild card here, in fact the very thing that will determine the future of the global economy. Again, if you look at the trend, the derivatives losses are not slowing down and nobody knows where it will end. But when these losses stop coming or when the government stops paying for this garbage, then I beleive it will be a good time to invest in America. But beware, not until the black hole of derivatives has gone away completely is it safe to really invest in anything related - and by related I mean economies with financial sectors exposed to these instruments. Even a company like GE, mentioned just above, has taken credit losses although they may see great growth in places like China. So, until the green light comes up... let's focus on precious metals, perhaps energy and perhaps some more independent economies.

From the viewpoint just expressed I think it looks reasonable that things may well not go so bad as some have predicted; government can really only put the people in so much debt. I doubt that we really will see more than, at the most, another five trillion of bailout or stimulus money (which in itself is obviously a humongous lot of money). But then the US government has to cut down on a lot of other spending as well, which may prove difficult - but they would not be the first country in history to have run up a huge public debt, and others in that position have prevailed. Big problems are on the horizon and the government of the US really has to do things right in order for this crisis to be resolved (globally, as well) - so far they haven't. Hopefully even they may start to see that the bailouts are not sustainable and that the spending has got to be cut. I may seem naive to say that politicians like the Obama-gang might actually learn something, but stranger things have happened, and we should all hope that they do learn... unless you happen to really like things post-apocalyptic?

China's worried...