Tuesday, October 05, 2010

U.S. Economy Faces No-Growth Stagflation

The U.S. is in no position to lead the global economy away from the brink of a double-dip recession.  The rest of the world is doing just fine without us:

Just three years since America began dragging the world into its deepest recession in seven decades, Goldman Sachs Group Inc., Credit Suisse Holdings USA Inc. and BofA Merrill Lynch Global Research are forecasting that this time will be different. Goldman Sachs predicts worldwide growth will slow 0.2 percentage point to 4.6 percent in 2011, even as expansion in the U.S. falls to 1.8 percent from 2.6 percent.

That's the Wall Street consensus, and we all know how the best and brightest often get forecasts wrong.  There's some wisdom in the general point about U.S. weakness even if you want to quibble with the specific numbers.  Nations that find themselves in weak competitive positions often resort to trade sanctions as a last resort:

Legislators from both sides of the aisle, frustrated by years of conversations with China over the deep imbalance in trade activity between the two countries, and concerned over plant closings in their districts, are beginning to take action.

Here's a point that appears to be lost on our erstwhile legislative saviors.  China buys a whole lot of Treasury bonds to allow us to fund our profligate empire.  If we launch a trade war using a specious provocation like a WTO complaint over currency manipulation, China will probably exercise their nuclear option of ceasing to buy our sovereign debt.  Say goodbye to the bond market bubble when that happens, regardless of any good economic news

The U.S. has no decent path out of its no-growth future as long as we keep piling on debt.  China knows this and plans accordingly.  Joe Six Pack remains sound asleep in front of the TV. 

Full disclosure:  Long FXI with covered calls.