Today’s US employment report was, at first glance, the best in years. 300,000+ new jobs, rising wages, fewer people dropping out of the workforce, the whole package. Very hopeful. And also curious, since the rest of the world seems to be moving in the other direction. Consider:
British workers suffer biggest real-wage fall of major G20 countries
ECB Sharply Cuts Inflation, Growth Forecasts
Bundesbank slashes German growth forecast for next year
Japan’s economy likely shrank less than expected in third-quarter, but still fragile
China ‘triple bubble’ points to long slide for commodities
It’s a mess out there. So why isn’t it a mess here? And what does the divergence mean for 2015 and beyond? The answer begins with this chart:
Between 2009 and 2013 the US Fed more than quadrupled the size of its balance sheet — which is another way of saying it pumped trillions of new dollars into the banking system. Most of this flowed directly into financial assets, spiking stock and bond prices and enriching the already rich. But lately a bit has found its way to Main Street via increased business hiring (hence the good jobs numbers).
The Bank of Japan, meanwhile, sat on its hands until 2013 when it belatedly started printing, about doubling its balance sheet in a single year. The European Central Bank was even tighter, actually shrinking its balance sheet in 2013, to barely more than its 2009 level.
Looking at this chart in the absence of any other data, one would expect the US to 1) have a weaker currency between 2009 and 2013 and 2) now be growing more robustly with higher inflation. And that’s exactly what has happened.
But next year is where things get interesting. Japan now intends to double the BoJ’s balance sheet by the end of 2015. And Europe, though it’s requiring some debate between Germany and the rest of the continent, will almost certainly join the party in January. The US, in contrast, intends to declare victory and stabilize the Fed’s balance sheet at these levels for a while.
So if the money creation trends depicted in the previous chart are about to reverse, then it’s logical to expect 1) a strong dollar and weak yen and euro, and 2) recoveries (relatively speaking) in Europe and Japan concurrent with slower growth or actual recession in the US. Prediction #1 has already come true, with the dollar soaring by over 10% in the past few months and up big again today (Dec 5):
Prediction #2 will take a little longer but should be apparent pretty soon, especially if the dollar has another month like the last one.
With one big caveat: These kinds of currency war strategies work until they don’t. Each iteration requires more debt, and eventually that debt reaches a point where no amount of new play money can stop the bad-paper implosion. This might be that time, or it might not. We’ll only know in retrospect.
Each currencies value also represents the ability to lead and manage by each of their respective Govts,not just the Central Banks. When their is civil unrest,poor tax structure,militirization of the local police,invasion of privacy,a loss of liberty & freedom,this also weakens one currency. Similar to the EU with its many member states, the US also has 51 of their own. Most are bankrupt along with their capitals and cities. A recent report noted that many of them like the Federal Govt fudge the numbers. Owing billions, theses states have no way of printing money. These black swanns are many. Not all currency traders eyes are affixed to the CB’s. Something to keep in mind.
The flip side to all of these weakening currencies (except for the US – for now – more about that below) is “price inflation”, or things desired or needed by “the masses” costing more. With relatively fixed incomes that necessarily means that less can be purchased, which in economist parlance means less demand and economic activity.
Now, in the US, the US dollar is currently relatively strong compared to these other more desperate countries’ currencies, but that is causing problems too. Besides the fact that there is both an over supply and under-demand of oil, the strong dollar makes the price of oil even less than it otherwise would be because most oil is priced in dollars. So, oil cost relatively more in most other industrialized countries because of their purposely weakened currencies – thus depressing “demand” – and the lower dollar price of oil is making domestic US oil production uneconomic. All things being equal, at some point a new supply-demand price point will be reached. However, the global monetary system cannot tolerate a “steady state”. Economic/monetary growth must continually grow ad infinitum or else break downs occur. This is where the rubber is hitting the road. Real economic growth can no longer keep pace so we are beginning to see a permanent breakdown of the status quo. Only the timing is in question.
Looking at the 10 year chart of the Euro/Dollar exchange rate, there is no evidence of any weakening of the Euro or any strengthening of the Dollar. It is all long term noise.
The collapse of the Euro has been predicted on this board by many people (including John Rubino) for well over ten years. It has not happened yet, and very likely will not happen during the next decade either.
Reality is different from wishful thinking.
Temporarily?! Really?! The US economy has been outperforming for 5+ years!! Wake up!! S&P is goin to 3000! But I bet Johnny rubino and all the other moron pumpers bought the -80% gdxj. Fools.
Yep, the window dressing has been awesome ever since the last time all of Western finance nearly collapsed. At least things look cheery as we await the sequel.
One of your ancestors must’ve been a set manager for the Potemkin villages.
Seems to be a simplified explanation in a very complex world.
If your measures of “recovery” are market valuations, its reasonable to expect this rotation, though European equities appear a little resistant, I expect your outcome to unfold.
As for a “main street” type economic recovery, Europe still holds the best cards long term, if they don’t resort to super Mario tactics.
Japan has both debt and demographic obstacles at untenable levels for the long term.
Expect unintended consequences, like the collapse on oil prices (priced in dollars), that
“no one expected”. It has since been described as foreseeable in world supply/demand forecasts, while the mime that “Saudi Arabia unilaterally did the deed” will prevail here in the US. Other OPEC ministers believe otherwise and have said so.
Guess what- now we are about to experience the next unintended consequences that come from this last set of consequences, and then again!- yet the timing and reactions to events, as the author states, “we’ll only know in retrospect”.
Note to self
You only think you know, and you really can’t be sure
you don’t know what you don’t know, but thinking you know is quite a lure.
So its all about would or could happen, should happen- but will it happen?
There is always room for error, so it gets down to probabilities.
the probabilities of something bad happening have increased simply as a
function of negative stress in the world, and the birthright of unintended consequences
to carry their parents genes.