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Americans are beginning to realize the gravity of the current U.S. economic situation. After the new Treasury Secretary spoke earlier this week he left us with a very uncomfortable feeling: This problem is huge, and no one seems to have a real answer.
Still, the government feels it must produce an answer and prove that it is the ONLY entity that can fix this mess — via hundreds of billions (perhaps trillions) of U.S. dollars.
The effectiveness of recent proposals is uncertain; but the potential long-term consequences are great. If government aid creates a premature recovery, we’ll be relieved of some pain … only to have other pains cast upon us. The outlook is downright ugly.
But even though the severity of the U.S. recession is growing worse by the day, the U.S. may actually be in the least bad shape when compared to other economies.
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In fact …
Here Are the Two Areas that I Think Will Suffer the Most!
China —
Overdependence on
Western demand …
China has become a huge global player. Unfortunately for them, the Chinese depend largely on the role of Western consumer demand.
And the numbers show how that dependence is now smacking the daylights out of their economy:
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| Unfortunately for the Chinese, their economy depends largely on the role of Western consumer demand. |
- In January, China’s exports sank by 17.1% year over year — the second straight month of declines.
- At the same time, China’s imports absolutely plunged — down more than 43% from January 2008.
- More than 20 million lost jobs add to the potential for social unrest.
- The real estate market is easily in the worst shape it’s been in since at least 2005.
Being the surplus nation it’s become, China will need to somehow replace Western demand in order to soften the painful readjustment to output and production that lies ahead. This readjustment will not only hurt China’s growth rate, but it will seep into those markets reliant on Chinese demand.Which leads me to …
Europe —
Concealing underlying
struggles …
If there’s anyone still behind the curve, it’s the Eurozone economy. By that I mean the European Central Bank is still lagging in their downward monetary policy adjustments.
Inflation is currently not a problem; but growth is. In fact, fourth-quarter GDP contracted 1.5% — the worst on record for the single-currency group of countries.
While a quicker move toward a zero rate of interest won’t solve their problems, I believe that the ECB should take interest rates further in that direction. Holding off with these key moves seems an attempt at concealing the underlying struggles Europe must eventually face.
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Among them lies a very vulnerable banking system. Considerable exposure to emerging market debt is one of the biggest concerns, especially when you consider the heavy liabilities already weighing on these banks. This credit and lending situation will certainly hamper any hopes of recovery in the near future.
Turning to European governments likely won’t reveal any support either. Germany is already having trouble passing through a stimulus package. And the short leash the government has for expanding an already high tax-to-GDP ratio will pose an ongoing obstacle.
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| The U.S. isn’t the only government passing out money left and right in hopes of avoiding severe declines. |
No Shortage of Stimuli …
The U.S. isn’t the only government scurrying to provide help. For example, China, Japan and South Korea are dishing out dough left and right in hopes of avoiding severe declines. So far, though, all have failed to bring about intended effects.
The risk-environment seems to have changed for the foreseeable future. Consumer appetites have changed. Demand stimulation is almost certainly destined to fail. A major readjustment period is upon us.
In my experience, when it comes to currencies it’s all about finding out who is sitting on high ground when the storm and downpour comes through.
And in this case, it seems the real task is to find out who will be the best swimmer. My bet is on the U.S.
Best wishes,
Jack
P.S. Are you hungry for the latest on what’s going on in the currency markets? Then be sure to check out my blog.
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