were wrong as China and the emerging economies continue to surprise on the
upside, while simultaneously the developed economies continue to alarm on the
downside. Perhaps now the reader can begin to see why the recent advice from
PIMCO's chief executive and chief investment advisor Mohamed El-Erian is so
relevant:
The rebalancing of relative economic power is not only alive
but gaining momentum ... Average investors need to make sure that they are not
hostage to an outdated conventional wisdom that underexposes them to this
phenomenon.
Summary
A number of popular assumptions continue to be bandied about in the media with
respect to the issue of whether any new global
order is arising to replace the old one that revolved around the US and the
dollar.
One of these assumptions is that China has lent the US so many dollars that it
cannot do anything about its deep exposure to the US currency without
triggering a potential collapse in the value of its huge holdings. This popular
notion continues with the line that therefore, US leverage over China's actions
is, in effect, greater than China's leverage over US actions. To many this line
of reasoning appears sound. It isn't.
For one thing, China's leaders are accelerating along the path of converting
excess dollars into resources and other hard assets. For another, they are
accelerating along the path of decoupling. And for yet another, they are
positioning to oblige the US to issue panda bonds (see
BRIC group plans own revolution, Asia Times Online, June 17, 2009).
The US, represented by the present administration, most certainly will not be
able to withstand the mounting external pressure, not only from China but also
from Japan and other key foreign lenders, to begin borrowing in foreign
currencies so as to protect the interests of the lenders. Keep close watch on
unfolding developments because you will soon see the notion that China is
"stuck" with the dollar get thoroughly exposed for being the groundless
conjecture it really is.
Another popular but unfounded assumption is that China and the other
under-developed economies cannot achieve decoupling from the US and the rest of
the developed economies. We have seen in our analysis that China is already
achieving a significant measure of decoupling, via its ability to quickly
throttle forward domestic demand. If it had not already been able to achieve
this significant measure of decoupling then its GDP would have collapsed into
negative territory (recession). It has not and will not do so.
We have also seen how China's partners in the emerging economies increasingly
revolve around it (China) as a new driver of global demand and growth, and how,
collectively, the under-developed world is rapidly displacing the US and the
other developed economies as the real driver of global demand and growth. While
the developed economies remain stuck on the sidelines, being forced by their
own massive over-reach to deal with the seemingly endless cascade of
self-inflicted financial and economic problems, the under-developed world is
beginning to emerge first from this global crisis. That spells the incremental
arrival of a new global driver.
Yet another popular myth is the assumption that the US and the developed
economies are merely undergoing a cyclical downturn, albeit a severe one, and
they will soon return to growth and will recapture their global position as the
driver of demand and growth.
This crisis is no mere cyclical downturn for the developed economies. It is
rather a full-blown crash of their shortsighted bubble-based economic model
which they fully embraced in such a foolhardy fit of arrogance and greed. Now
they are paying the colossal price for their un-wisdom. The finances of the
developed economies are in profound trouble. Yet their governments continue to
spend colossal sums of money in a vain attempt to reboot their utterly failed
model.
The world's lenders are increasingly repulsed by this slipshod conduct and are
becoming ever more wary of holding the dollar or Treasuries. Considering the
massive amount of government propping and stimulus, the US and the other
developed economies may soon "revive" to some nominal economic growth for a
brief time, but it absolutely cannot last. The multipronged and excessively
painful bill for all the profligate spending being undertaken by the
governments will inevitably come due, trouncing their economic growth prospects
for a long time to come.
In addition to perpetual economic stagnation, or worse, they are setting
themselves up for an inevitable and enduring bout of inflation, or more likely,
hyperinflation. Stagnation and simultaneous inflation (stagflation) spell
eventual doom for their already deeply troubled fiscal positions, and impending
crisis for the dollar.
Consequently, against the backdrop of all the unyielding facts detailed in this
series of articles, let no one fool himself into imagining that nothing
fundamental is changing for our global order. Indeed, a truly fundamental
transition of gargantuan consequence is underway and is even now accelerating.
The global order is progressively finding a new center around which to revolve.
The fact that the dollar is still the most prominent global reserve currency
(it is wholly contrary to the facts to refer to the dollar as the global
reserve currency, since the dollar shares that reserve currency status with
other currencies) only papers over the elemental transformation of the global
order that is already taking place.
The reader must take to heart the sagacious advice of PIMCO's El-Erian: "Do not
allow yourself to be held hostage to outdated conventional wisdom that blinds
one to the reality of the accelerating rebalancing of global economic power" -
a rebalancing that features the strategic rise of the emerging economies and
the simultaneous strategic decline of the developed economies.
References
1. "The Chinese puzzle: why is China growing when other export powerhouses
aren't?", Brad Setser/Follow the Money, June 9, 2009.
2. "Data Shows China Relies More on Growth at Home", New York Times, June 11,
2009.
3. "Why the Export Slump Won't Doom China's Economy", BusinessWeek, April 20,
2009.
4. "El-Erian Says Summit Shows ‘Rebalancing' as BRICs Buy IMF Bonds", Bloomberg
News, June 12, 2009.
5. "China Loosens the Yuan-Bond Market", Wall Street Journal, May 20, 2009.
6. "Panda Bonds Could Help China Avoid the Risks of US Treasury Bonds", East
Asia Forum, Dec 19, 2008.
7. "Analysis: Time to Reintroduce the Panda Bond", Caijing Magazine, Dec 17,
2008.
W Joseph Stroupe is a strategic forecasting expert and editor of Global
Events Magazine online at www.globaleventsmagazine.com
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