US economy running on bad oil
Manjit BhatiaPublished: Apr 21, 2005 2:20 PM | Updated: Jan 29, 2008 6:21 PM
Join the club if you've been wondering what was happening to the world's stock markets in mid-April. The volatility was stunning, rocking nearly every share market from America to Asia and those that became the proverbial tuna in the sandwich. Even Australia, often boasted by Australia's treasurer Peter Costello as the world's best, took a hammering. And Costello was seen smarting from his arrogance with yet more spin. The minor exception was London, but only minor.
Some analysts said the volatility was due to investors' anxiousness about a slowing global economy. That's true. Others say world commodity prices look to have peaked and that's sure to hit resource-based economies like Australia and resources-hungry countries like Japan and China and India three of the world's biggest economies after America's. That's true too. Then there are some analysts who say it's nothing more than a technical correction. We'll see.
For my money the real story behind the world's share market shakedown is the US economy. Since picking up steam after the tech-run bubble burst in 2000, and the likes of Enron came tumbling down harder than Humpty Dumpty fell thanks to good old American good governance standards the US economy has been billowing blue-white smoke. That's a sign of good health of a motorcar. But lately it's been puffing out some black smoke. Now any motor enthusiast will tell you that's not a good sign. So what gives: bad oil?
Why is the world suddenly being hit by a share market shakedown? Manjit has some answers.
Join the club if you've been wondering what was happening to the world's stock markets in mid-April. The volatility was stunning, rocking nearly every share market from America to Asia and those that became the proverbial tuna in the sandwich. Even Australia, often boasted by Australia's treasurer Peter Costello as the world's best, took a hammering. And Costello was seen smarting from his arrogance with yet more spin. The minor exception was London, but only minor.
Some analysts said the volatility was due to investors' anxiousness about a slowing global economy. That's true. Others say world commodity prices look to have peaked and that's sure to hit resource-based economies like Australia and resources-hungry countries like Japan and China and India three of the world's biggest economies after America's. That's true too. Then there are some analysts who say it's nothing more than a technical correction. We'll see.
For my money the real story behind the world's share market shakedown is the US economy. Since picking up steam after the tech-run bubble burst in 2000, and the likes of Enron came tumbling down harder than Humpty Dumpty fell thanks to good old American good governance standards the US economy has been billowing blue-white smoke. That's a sign of good health of a motorcar. But lately it's been puffing out some black smoke. Now any motor enthusiast will tell you that's not a good sign. So what gives: bad oil?
Maybe. Certainly the most recent numbers for the US economy by far the world's biggest and the most important for the world economy haven't been very encouraging. Jobs growth is keeping pace with economic growth, at roughly 4-4.5% GDP, but it's starting to look shaky again. Profit results from global companies like IBM have also spooked investors. Production index has turned down, possibly for cyclical reasons. But oil prices as I had predicted last year to hit US$60 a barrel, and almost did haven't helped. They've come down a notch but they're still too high, too volatile and while greedy oil mullahs and others are laughing all the way to the bank, they're sure to bite them back.
Inflationary fears
Right now the biting is in the US economy, specifically inflationary fears. And if you read Federal Reserve Board boss Alan Greenspan's March 22 press release, announcing a 25 basis points rise in the target federal funds rate to 2.75%, you'll get an idea that Greenspan may have dropped the ball on future interest rate policy. First, he had aggressively cut rates as the economy turned wormlike and ran to hide. Now that the worm has turned the other way, Greenspan may be getting ready nervously to aggressively lift rates to head off the inflation demon.
The US, like Japan and most of Europe, have dropped their bundle on interest rates. They've been so low for so long hoping to boost growth via aggregate domestic demand that they've helped to drown the US dollar in a sea of investor worry. Partly the US dollar's woes are market driven, but it's a policy implicitly supported by US Treasury and the Bush administration as long as the other demon the twin deficits (budget and trade deficits) continue run amok. If the euro and the Australian currencies are up, it's only because the US dollar is down. No big deal except for European and Australian exporters.
But aggressively upping rates can spook other central banks into knee-jerk reactions, even if the domestic data suggests there's no need to panic yet. If you look at China, you'll see Beijing isn't showing any worries of inflation there, which it says is under control. But that's if you buy Chinese numbers. Recall Asia before the late 90s financial crisis that had buried almost all of Asia's 'miracle' economies: the same kind of strong denials were mooted by regional governments. One after the other. Then, whammo: they sunk one after another.
No chance of the US economy sinking, because the rest of the world totally dependent of the US market and increasingly on China for their exports revenues won't let it drown. The world is the US economy's international monetary fund last resort financier. But for how long? For as long as it takes not to let Greenspan loose on rates policy and not to let the US dollar rise too fast as US interest rates lift because Asian (and European) exporters don't want to see their own currencies get whacked again. Especially when, after the Asian crisis, none of Asia's governments have had the stomach to push for real reforms that would have seriously hurt their business cronies and eroded their political support.
Why worrry?
So, should the world worry about Greenspan's finger on US rates policy? Not one bit. Read his March 22 press release carefully and you'll see he probably has been ear-bashed by White House policy gorillas to let go of the rates trigger. Greenspan said then that "longer-term inflation expectations remain well contained", despite price pressures. Compared to previous Greenspan statements, this is new but not nearly pressing enough. Because further down in his statement Greenspan said underlying inflation can also be "contained". Meaning there'll be policy accommodation. That's code for what he has been saying lately that rate rises will be at a "pace ... likely to be measured".
Meaning what? Meaning no more than Greenspan's growing frustration with the White House policy gorillas but there's little he can do about that. Which is why this will be Greenspan's last term as Fed boss, though I think he'll quit after the next Fall. "Measured" says the Fed's policy has changed course, that "measured pace" signals more rate rise in the future, but no more and no less than basis points and at intervals likely to be more than a month, possibly three. Why? Because the White House policy gorillas, much to Greenspan's chagrin, haven't a clue about what to do about the menacing twin deficits. They're dithering.
Then again that's not unusual. If you look at Asian governments and their post-crisis 'reforms', they haven't done much either. They too have sat on their hands and wished upon a lucky star that their deliberate low currencies will pick up their export economies and all will be hunky-dory. Thing is, old structural problems still lurk beneath their recent high growth rates. But, like America's dizzy growth rate through the 1990s, Asia's economies are being re-built on sand. Wait for the next tsunami.
MANJIT BHATIA, an academician and writer, is also research director of AsiaRisk, a political, economic and risk analysis consultancy in Australia. He specialises in international economics and politics, with a focus on the Asia-Pacific.
Some analysts said the volatility was due to investors' anxiousness about a slowing global economy. That's true. Others say world commodity prices look to have peaked and that's sure to hit resource-based economies like Australia and resources-hungry countries like Japan and China and India three of the world's biggest economies after America's. That's true too. Then there are some analysts who say it's nothing more than a technical correction. We'll see.
For my money the real story behind the world's share market shakedown is the US economy. Since picking up steam after the tech-run bubble burst in 2000, and the likes of Enron came tumbling down harder than Humpty Dumpty fell thanks to good old American good governance standards the US economy has been billowing blue-white smoke. That's a sign of good health of a motorcar. But lately it's been puffing out some black smoke. Now any motor enthusiast will tell you that's not a good sign. So what gives: bad oil?
Maybe. Certainly the most recent numbers for the US economy by far the world's biggest and the most important for the world economy haven't been very encouraging. Jobs growth is keeping pace with economic growth, at roughly 4-4.5% GDP, but it's starting to look shaky again. Profit results from global companies like IBM have also spooked investors. Production index has turned down, possibly for cyclical reasons. But oil prices as I had predicted last year to hit US$60 a barrel, and almost did haven't helped. They've come down a notch but they're still too high, too volatile and while greedy oil mullahs and others are laughing all the way to the bank, they're sure to bite them back.
Inflationary fears
Right now the biting is in the US economy, specifically inflationary fears. And if you read Federal Reserve Board boss Alan Greenspan's March 22 press release, announcing a 25 basis points rise in the target federal funds rate to 2.75%, you'll get an idea that Greenspan may have dropped the ball on future interest rate policy. First, he had aggressively cut rates as the economy turned wormlike and ran to hide. Now that the worm has turned the other way, Greenspan may be getting ready nervously to aggressively lift rates to head off the inflation demon.
The US, like Japan and most of Europe, have dropped their bundle on interest rates. They've been so low for so long hoping to boost growth via aggregate domestic demand that they've helped to drown the US dollar in a sea of investor worry. Partly the US dollar's woes are market driven, but it's a policy implicitly supported by US Treasury and the Bush administration as long as the other demon the twin deficits (budget and trade deficits) continue run amok. If the euro and the Australian currencies are up, it's only because the US dollar is down. No big deal except for European and Australian exporters.
But aggressively upping rates can spook other central banks into knee-jerk reactions, even if the domestic data suggests there's no need to panic yet. If you look at China, you'll see Beijing isn't showing any worries of inflation there, which it says is under control. But that's if you buy Chinese numbers. Recall Asia before the late 90s financial crisis that had buried almost all of Asia's 'miracle' economies: the same kind of strong denials were mooted by regional governments. One after the other. Then, whammo: they sunk one after another.
No chance of the US economy sinking, because the rest of the world totally dependent of the US market and increasingly on China for their exports revenues won't let it drown. The world is the US economy's international monetary fund last resort financier. But for how long? For as long as it takes not to let Greenspan loose on rates policy and not to let the US dollar rise too fast as US interest rates lift because Asian (and European) exporters don't want to see their own currencies get whacked again. Especially when, after the Asian crisis, none of Asia's governments have had the stomach to push for real reforms that would have seriously hurt their business cronies and eroded their political support.
Why worrry?
So, should the world worry about Greenspan's finger on US rates policy? Not one bit. Read his March 22 press release carefully and you'll see he probably has been ear-bashed by White House policy gorillas to let go of the rates trigger. Greenspan said then that "longer-term inflation expectations remain well contained", despite price pressures. Compared to previous Greenspan statements, this is new but not nearly pressing enough. Because further down in his statement Greenspan said underlying inflation can also be "contained". Meaning there'll be policy accommodation. That's code for what he has been saying lately that rate rises will be at a "pace ... likely to be measured".
Meaning what? Meaning no more than Greenspan's growing frustration with the White House policy gorillas but there's little he can do about that. Which is why this will be Greenspan's last term as Fed boss, though I think he'll quit after the next Fall. "Measured" says the Fed's policy has changed course, that "measured pace" signals more rate rise in the future, but no more and no less than basis points and at intervals likely to be more than a month, possibly three. Why? Because the White House policy gorillas, much to Greenspan's chagrin, haven't a clue about what to do about the menacing twin deficits. They're dithering.
Then again that's not unusual. If you look at Asian governments and their post-crisis 'reforms', they haven't done much either. They too have sat on their hands and wished upon a lucky star that their deliberate low currencies will pick up their export economies and all will be hunky-dory. Thing is, old structural problems still lurk beneath their recent high growth rates. But, like America's dizzy growth rate through the 1990s, Asia's economies are being re-built on sand. Wait for the next tsunami.
MANJIT BHATIA, an academician and writer, is also research director of AsiaRisk, a political, economic and risk analysis consultancy in Australia. He specialises in international economics and politics, with a focus on the Asia-Pacific.
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