Most Popular ArticlesJuly 7, 2009
The U.S. dollar and Treasury bonds will retain their value and status as a safe haven, mostly because they are the “best of a bad lot,” Shilling said. The sell-off of Treasury bonds since March, when many who believed the recession was over increased their appetite for risk, was “temporary.” The dollar will recover, he said.
Shilling warned that “commodity currencies” – those of New Zealand, Australia, and Canada – will be weak as dampened worldwide consumption levels will depress commodity prices. “China is not going to buy up all the commodities in the world,” he said. The British pound will suffer because of the UK’s oversized financial sector (15% of its economy, as opposed to 5% of the US economy). And the Euro “has its own problems because of its one-size-fits-all structure,” he said. Individual countries – especially Spain, Portugal, Ireland and Italy – cannot cut interest rates to deal with economic weakness. As a result, they must take on more debt, increasing the likelihood of ratings downgrades and that they will drop out of the ECU and go back to their own currencies.
Investors should not worry about if or when China will stop buying U.S. Treasury debt; it will not happen, Shilling said, because “the Chinese are not suicidal.” If the Chinese moved away from investing in dollar-denominated assets, the U.S. currency would collapse and trigger a global Depression. The Chinese, whose economy is utterly dependent on exports, would be the big losers.
The U.S. economy has been the consumption engine powering the world economy, but that leadership came at the expense of reduced personal savings and increased consumer debt. Most thought the end would come when the Chinese stopped taking dollars. Instead, as Shilling said, the end came when the U.S. consumer hit the wall.
Now the Chinese want to export, but the U.S. does not want to import – and the U.S. wants to export as well. If everyone wants to export, the logical result will be protectionism. “This will be very unfortunate and will lead to slower growth in the long run,” Shilling said. “Protectionism is a very real threat.”
Shilling echoed the forecasts of PIMCO’s Bill Gross and others, who foresee a “new normal” – GDP growth of 2% – not the historical average of 3.6% and not high enough to prevent rising unemployment. Shilling expects the federal government to play a bigger, “chronic” role in preventing high unemployment, because politically it cannot afford to have the jobless rate rise year after year. He did not say what measures this chronic intervention would take.
The recession’s shape will be more like an L, Shilling said, with slow recovery and muted growth. “I see nothing steep enough to suggest anything like a V-shaped recovery,” he said.
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