Edited by W. Joseph Stroupe with the mission of explaining world events correctly via strategic analysis & forecasting
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The hitherto unquestioned global economic leader, the US, has endured a number of economic downturns and full-blown recessions over the past several decades, few if any of which have carried serious negative geopolitical implications for the US. The rest of the world has endured the repercussions of such US economic setbacks and historically has confidently continued to look within the framework of the US-centric global economic order for solutions and a path forward.
Even with the serious and growing structural problems within the US economy, few mainstream economists would say the current US-centric global economic order is breaking down. Fewer still would label it already broken.
Could the experts be wrong? Might they be in a measure of collective denial as to the real seriousness of the current US situation and how imminent the repercussions could be? Is it possible, even incontestable, that the old order is already being fundamentally undermined by the US’s own deepening structural problems, by flagging international confidence in the old US-centric order and by the rise of new and powerful Eurasian economies that don’t suffer from the array of deep structural problems now inherent in the US economy?
By measurements that turn out to be largely superficial from a strategic standpoint, the US economy appears to be holding its own on the global stage. Foreign cash inflows have generally continued until now to cover America’s financing requirements on a month-by-month basis. While the dollar has given up most of its 2005 gains, it certainly is not in a free-fall as of today. And US economic growth, though now slowing, has been more than that enjoyed almost anywhere else.
So why should anyone be concerned about basic US economic health or America’s current global economic position? If an economic downturn, or even a recession, is now building, why should we consider that this time it might carry painful negative geopolitical implications for the US on the world stage?
The accurate answers to the questions raised here are to be found in a two-fold investigation, that of (1) the unmatched elemental causes for the onset of the current US downturn, the Fed’s extremely limited options for dealing with it and the ominous timing of its occurrence, and that of (2) the implications brought by an unprecedented fundamental transformation of the global economic order that has already been taking place for a few years. By looking below the benign and often-deceptive surface events which frequently mask the far more important deep-seated trends, we can get a clearer idea of where the global order is already heading.
The equities bubble burst of 2000 which evaporated some $7 trillion dollars of wealth virtually overnight, and the recession of 2000/2001 presented the Fed with a situation that its leaders evidently felt should be used to justify strong action. They also felt, rightly or wrongly, that they need not wait mostly on the sidelines this time, that instead they had acquired unprecedented knowledge, wisdom and power and that they therefore had the tools and the skills to actually lift the economy out of recession in unprecedented fashion and possibly even with blinding speed.
Starting early in 2001 the Fed employed an array of powerful synthetic stimuli, like economic steroids and speed, referred to by the Fed as “prolonged monetary accommodation” – it lowered interest rates finally to 50-year lows and kept them very low for nearly five years. It also continued to print huge sums of paper money. It thereby pumped the economy up with massive liquidity, but simultaneously it powerfully fueled currency and asset inflation. The era of cheap and easy money was born.
The US economy on Fed ‘steroids and speed’ quickly began to show growth on the books, and judging mostly by the numbers the Fed wanted highlighted it had indeed lifted the economy out of recession in truly unprecedented fashion. But there was and is a high cost, and the growth the Fed got wasn’t nearly akin to that of previous ‘natural’ recoveries that were not induced by massive artificial means. Real private-sector job growth and real wage growth have been very sickly, often dithering in negative territory, years after the “recovery”.
Nearly 70% of US economic growth is accounted for by consumer spending, and the Fed’s constant injections of ‘steroids’ (high liquidity) and ‘speed’ (paper money) into the economy facilitated the refinance and real estate “booms” that permitted US consumers to go on a spending binge of unequalled proportions. However, the spending money has come inordinately from borrowing against inflated real estate and other assets and thus indebtedness has assumed gigantic proportions while the saving rate has hovered near 0%. Fed policies directly facilitated the current enormous real estate and asset bubbles that are even now moving toward deflating. Recently it was reported that the global equities downturn prompted by inflation fears has already evaporated more than $2 trillion dollars in wealth so far, for but one example.
And speaking of inflation, the Fed’s activist approach to the recession of 2000/2001 powerfully induced rampant asset inflation seen in the form of bubbles – a real estate bubble for example. Much debate has been carried on as to whether or not there is a real estate bubble. The Fed, understandably, takes the position that there may be a few “local” bubbles and perhaps some “froth”, but that no enormous nation-wide real estate bubble actually exists. The problem with such “logic” is that it is the logic of denial. The massive run-up in asset prices has coincided so closely with the Fed’s policy of pumping massive liquidity into the economy, and the recent stall in that price run-up has also coincided so closely with the Fed’s hiking of interest rates to near the neutral level, that any denial of the existence of massive artificially-induced asset bubbles loses all credibility in the minds of thinking persons.
In all this, energy plays the key role, quite literally the king’s role within the US economy, thanks to the Fed and its short-sighted policies. This is because energy-induced inflation will either box the Fed hopelessly into an impasse, or conversely will ease to let the Fed out of its current impasse. Any easing of energy-induced inflation is a slim hope at best, however.
Of very special significance is the fact that US economic and geopolitical rivals in rising Eurasia fully understand the foregoing facts. That means two things of enormous importance:
First, their confidence in the US economy and the US-centric global order is being seriously and fundamentally undermined to an unprecedented degree.
Second, the same group of nations (rising Eurasia) along with their growing array of global oil and gas exporting partners already control the lion’s share of global energy and are extending such control rapidly. That means they have a growing ability to keep global energy prices at current levels or elevate them much further if they so desired.
Both factors above spell imminent disaster for the US-centric order, which is even now being incrementally replaced by a new order.
Any economic order stands or falls on the perceptions of its health, stability, reliability, desirability and profitability. Confidence is king.
Deep international worries over the stability of the US economy have mounted over the past few years. And since before the Iraq invasion of 2003 the desirability of the US-dominated economic and geopolitical global orders has come seriously into question as well. Thus, deep-seated international confidence in the US economy is already flagging.
As the US economy moves into slowing growth, toward stagnation, with a renewed and much steeper decline in the dollar, international observers won’t find it possible to look at the development as they used to – as merely a temporary downturn. Instead, with full understanding of how serious the situation for the US economy has become (as explained above), they will find it advisable, prudent and relatively easy by historical comparison to move to isolate their own economies from that of the US. While they cannot immunize themselves completely against the US downturn, they certainly can buffer themselves against it.
They have already been doing so in significant ways. Asia as a rising economic bloc has become such partly because its local member states each conduct more trade with each other than they individually do with the US. That trend continues to accelerate. Furthermore, Russia itself is almost completely independent of the US in economic terms. The global economic compass, as it were, is increasingly pointing eastward toward Eurasia as the rising center which now threatens to displace the US as the global center.
When Washington foolishly squandered and otherwise neglected its global network of alliances painstakingly constructed over decades of time while it invaded and occupied Iraq, real economic consequences set in. Most of the players have realigned economically and geopolitically with each other, with special emphasis on Russia and China as key centers of power, often leaving the US out of their calculations and agreements to a considerable extent. That has already been fundamentally transforming the old US-centric order for several years now, and it results in increased buffering and growing isolation from the US. That has largely been the intent of its players.
Central banks’ diversification of their forex reserves out of the dollar, what their governors repeatedly have called prudent policy, has also been underway for several years. Russia surprised the world recently when it reported that it has now achieved a breakdown of 50% dollars, 40% euros and 10% precious metals for its reserves. It was estimated that Russia was far less diversified out of the dollar than it actually was. The 50% dollars to 50% other currencies and precious metals is the ideal target mark central banks wish to reach, for that breakdown effectively immunizes them against loss in the event of a dollar crash.
The actual breakdown of central bank reserves is a closely guarded secret for obvious reasons. While diversification is taking place the central banks do not wish to telegraph their moves and risk causing a dollar crash before they are immunized. The big Asian central banks are undoubtedly following Russia’s lead and are much farther down the path of diversification than analysts think. By accumulating their growing reserves in non-dollar currencies and precious metals on an ongoing basis, rather than by selling off dollars, they can achieve the desired target makeup with a good cover of deniability.
Eurasia has thus already done much preparation for the replacement of the old US-centric economic order with a new one centered in the East. Such replacement could come much sooner than currently envisioned in the West.
When the unprecedented US downturn soon sets in many in the US, including many political and economic leaders, will be surprised to find that a new and vibrant Eurasia-centric economic order was already waiting in the wings to take its place.
| Note: This Gold version of the analysis is significantly condensed as compared to the full text Platinum version available only to subscribers. The Platinum version addresses head-on the issue of energy-induced inflation and precisely how that factor is pushing the Fed ever deeper into a virtually hopeless impasse on economic growth. |
© Copyright 2004-2008 This article may not be reproduced, reprinted or otherwise disseminated, nor may its inherent distinctive and original ideas be used elsewhere without the prior written permission of W. Joseph Stroupe. No journalistic, analytical, editorial or forecasting substance from GeoStrategyMap.com may be republished or employed in any form without prior written permission. Send all requests for permission by email to: editor_in_chief@geostrategymap.com. |
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