While American traders and politicians seem fixated with the Euro zone and its financial mess, China has been the focus of concern among prominent American economists. Nationally, it’s all doom and gloom. The debt of practically every nation in Europe including Germany gets riskier by the day. The failure of the U.S. congressional supercommittee to make any decisions, much less substantive decisions on cutting America’s deficit means that chances increased for another eventual credit downgrade. U.S. T-bills continue to do relatively well only because Europe is a bigger disaster zone by comparison. Stock markets are suffering the fallout of partisan politics.
If there’s any good news, it’s that until the recent sell-off, stocks had been slowly but steadily rising, with U.S. markets up about 10% since the beginning of October. Home sales are up, but the value of those homes continues to erode. And this is happening with Europe imploding and oil prices topping $100 a barrel. As strange as it seems, the disconnect makes sense; it reflects the growing disparity between the fortunes of companies, countries or citizens thereof. Once inextricably intertwined, they are now almost totally separate.
Stocks may be spooked by political ineptitude, but given half a chance, they want to keep rising. Most rich-country bond markets, on the other hand, are relentlessly negative. That’s because stock markets are driven by growth potential, which remains high, and bond markets are driven by investors’ confidence in being repaid, which is waning. In the U.S. and Europe, unemployment remains at stubborn highs, the debt picture is scary, and growth promises to be subpar at best. Furthermore, political gridlock dictates that this will be the picture for the foreseeable future.
Bonds reflect the fortunes of countries. Stocks reflect the fortunes of companies. And multinational companies increasingly float above national politics, hedging their risk and their investments around the world. For them, there’s been a fair bit of good news, including some underreported green shoots in the U.S. economy. Before the latest round of debt shenanigans spooked investors, stocks were rising in part because the data points in the U.S. were looking good. In the past couple of weeks, unemployment claims dropped, while bank loans, home sales, retail surveys and railcar loadings in the U.S. increased.
As much as the Republicans want you believe otherwise, the American economy is still in the crapper because of the investment banks unwillingness to deal with the market meltdown. They’re steadfastly holding onto $2 trillion in capital that they would normally be only too happy to loan to “small-business America” were they not holding it on their respective balance sheets to offset the toxic assets that still remain firmly planted on the negative net-worth sides of their ledgers.
And OWS has tried, albeit over-the-head of most Americans, to point this out among the myriad inequities they doggedly attempt to highlight. As long as the Republican presidential candidates and the protectors of corporate America continue to paint OWS in unflattering ways, and FOX continues to intentionally skew the facts regarding the movement as largely without message, meaning, or substance, OWS will have to find new ways to bring their disenchantment to the forefront of the media machine.
Corporate earnings have increased without any downturns, as the world outside the West continues to do pretty well. There are three legs on the global economic stool: the U.S., Europe and the emerging markets, namely China.
Most Western economists don’t spend enough time thinking about that last one, but multinational companies do. More than 30% of the business done by big American companies is now conducted in “poor” countries like China, and among some of the larger consumer-goods firms, the number is as high as 60%. In fact, for the past two years China has been the world’s top spot for new investment by America’s largest firms, according to the McKinsey Global Institute. The U.S. is still No. 2, but India, Brazil and Russia round out the top five, which says a lot about where companies are placing their bets.
Even if China does nothing to grow its domestic economy, Goldman Sachs estimates that the Chinese will buy goods and services equal to 10 times the Greek economy by 2020. If China manages to boost consumer spending by just a few percentage points, it will create enough growth to make two new Italys.
One of the reasons China’s spending has stayed on track is that Beijing, unlike Washington and Brussels, has done a decent job of managing a threatening economic climate. China has a burgeoning property bubble and banking issues of its own(as highlighted in earlier posts on this blog–“What If We Were Talking About China Instead of Greece”,, and “Rethinking Jobs and China”–and is entering its version of an election cycle. Even in China, politics will dictate that potential new leaders will seek to present tough facades, as new leaders seek to grab the spotlight.
Politicians such as Mitt Romney and Chuck Schumer have certainly baited Beijing on currency and trade. But the Chinese haven’t taken that bait; Premier Wen Jiabao said recently that China would “strengthen the yuan’s trading flexibility in either direction” only if it benefits China’s chances to create a more consumer-oriented economy. Translation: We’re ignoring America’s short-term, politically motivated thinking and sticking with our five-year plan.
Long-term plans for growth are the sort of things that large companies–and countries like China–have.
Too bad American politicians would rather focus on long-term POLITICAL plans instead of what’s good for Americans, which is long-term ECONOMIC plans..