The French and Dutch ‘no’ votes in their referendums on the EU constitution have led to further weakening of the euro, as talk of the ‘death of Europe’ spreads across the media. The dollar has also gained against the yen. Those who back the US model and its financial assets reckon the dollar will continue to strengthen because Europe is doomed politically and economically – a sclerotic hell of low-IQ lemmings. And Japan is seen as a dying economy with an irreversibly ageing population condemned to low growth and investor returns. So the dollar, being the least ugly whore in the bordello beauty parade, rather than because it possesses any inherent virtue, will triumph.
As for the economy, US corporations will continue to make profits because inflation will stick at 2% to 3%, so the Federal Reserve will stop tightening soon. This will allow the US consumer to keep on consuming and adding debt like rusty scrap to the slagheap of profligacy in the backyard of unaffordable luxury homes. Multiples of revenue (for everything from equities to bonds and real estate) will not have to plummet and there will be just enough profit growth to keep equity investors happy and too little inflation to make bond investors miserable.
By contrast, the bear case for US financial assets rests on a return of inflation or a collapsing dollar, thus spiking US interest rates to send global dollar liquidity into shrink mode. This gloomier view is driven by an engine with as many cylinders as an American SUV. They include the imbalances of the US debt bubble, a dearth of US household savings and excessive reliance on foreign capital.
Both prospects have a certain logic and are well known. But one of them has to be right. I would go for the bearish view since I reckon the dollar’s strength won’t survive long on the supposed superiority of the US economic growth model.
Both Japan and Europe have solid, balanced economies with zilch inflation, while the US has rising household debt and inflation, with an ever-wider external deficit with the rest of the world. Japan Inc continues to keep production costs low and Europe Inc is much more competitive than the markets think. The political sclerosis in Europe will not stop that being the case, just as it has not done in Japan.
Then there is the anti-European propaganda garbage (propaganda being what twists reality, garbage is what is rejected by it) that floats to the surface of every mediocre media anchor mind and spawns the mantra of “Europe’s death (and who misses it anyway?)” commentary.
Away from the chancelleries of the political elite and their effete constitutions and treaties, European integration is alive and well in the boardrooms of the EU corporate sector, which survives or dies on a competitive platform.
How many of these people know that European corporations have been increasing their global market share for the past three years while US Inc has continued to lose it? How many remember that Germany is still the world’s biggest exporter and that its exports are growing at least as fast as those of the US, even given the latter’s devalued currency? How many realize that, when measured fairly, Eurozone corporate productivity growth is on a par with that of the US?
That’s quite a record for a region that supposedly no longer makes anything the world needs. Anyone who studies globalization for more than five minutes knows that the real problem is that US labour, not Europe’s sclerotic bunch, no longer makes enough of anything its own consumers want.
At some point, the truth on trade will out and the dollar will plummet. My guess is that this will happen when the gap between US output and buoyant consumer demand closes after the current round of inventory liquidation is over.
But there is another darker world event lurking out there that could hit economic growth and financial assets globally. It is the issue of Chinese exports to the US and Europe coupled with the renminbi regime. China’s relationship with both Europe and the US is far more important for the prosperity of Europeans than EU integration.
But the issue has fallen from the table of rational debate into the pit of macho confrontation that makes any sensible outcome less likely. The US Congress prepares a protectionist war against China, while Europe’s leaders openly flout the decisions of the World Trade Organization to free up trade in manufacturing and services.
History is pockmarked with periods of great economic liberalization that ended with protectionism. Thus, parallel with discussions on the next stage of the Doha agreement to liberalize world trade, both the US and Europe have launched more protectionist deadlines against China, demanding that the renminbi be revalued.
Let’s get this straight, like it or not, the reason the Chinese are making all the products they do is because, by the law of competitive advantage, they should do.
If the politicians bring in a decade of protectionism, the loser will be everyone: global trade will shrink and consumer goods in the US will cost a lot more. Equities will suffer from a dearth of growth and bonds from inflation, both the result of nationalist attitudes. The impact of Europe’s failure to integrate will pale in comparison.
