Friday, March 20, 2009

Mapping uncharted economic territory

Americans shouldn’t really be blaming the Fed for what it has been doing lately. After all, it’s been doing what it’s mandated to do, which is to prevent further economic collapse, given the tools available to it, which is monetary policy.

If the Fed does nothing now, the collapse might be even worse. However , we do know that its actions are likely setting the stage for high inflation, or currency depreciation, down the road. This does not bode well for US economic power going forward.

But if the US declines as an economic power, who will take its place as numero uno? China? China has its own problems now. The key engine for its spectacular growth – exports, is now in steep decline. And it’s likely to get worse, as the economy of its chief export country, the US, gets worse.

At this time, no other country seems likely to step forward as the next clear economic power. There will definitely be no growth happening in a stagnant economy, so China will weaken if it doesn’t manage to stimulate its own economy.

It’s a toss up with the country where monetary policy is inducing inflation. On one hand, people will be forced to stop deferring purchases once they know money is about to lose value. But then again, local businesses will find it tough to survive in this kind of environment. It could end up a case of survival of the biggest.

But a country with high inflation does experience currency devaluation. That means its exports are getting cheaper. But in a world comprised of stagnant countries with weak domestic demand, and countries experiencing similar hyperinflation, it’s unclear who could end up being the economic savior (buyer). And with a weak currency, a high inflationary country doesn’t have the purchasing power to buy imports to stimulate stagnant economies.

This is uncharted territory.

1 comment:

Phillip Huggan said...

No one expects China to eclipse USA GDP soon. Whether or not there is a clear cut #1 is irrelevant.