The U.S. Will Lead the World Again
January 20, 2009
The U.S. economy is in better shape than you think. It may even start coming back in the second half of 2009, and the dollar will end 2009 higher versus the euro and yen.
At least, that’s the optimistic outlook Marc Chandler, Brown Bothers Harriman’s global head of currency, set forth in his keynote address at NICSA (National Investment Service Company Service Association) East Coast Regional Meeting on January 15, “Making Sense of the Dollar.”
“The U.S. will emerge from this crisis the way we emerged from World War Two” and other crises since, Chandler told his audience - “Stronger than before.”
The U.S.’s Path to Recovery
The U.S. economic crisis isn’t over yet. Chandler predicted that the economy may have experienced its worst losses in fourth quarter 2008, with an annualized 5% to 6% decline in gross domestic product (GDP). But things will improve from there. In his opinion, the economy will contract again in the first quarter of 2009, but less severely.
A first quarter contraction at an annualized rate of 3%-4% would “lay the groundwork for the economy losing its downside momentum,” he said. After that, he predicts that GDP will be flat during the second quarter. “A flat economy would be good news,” said Chandler, because things will improve from there.
Chandler feels optimistic that the U.S. economy will begin to grow again during the second half of 2009. Three factors will be critical:
- Stimulative fiscal spending, with the $750 billion package proposed by President-elect Obama expected to increase in the hands of Congress
- Very aggressive monetary stimulus
- Low oil prices — “We had a huge oil shock last year,” said Chandler. He said that hurt the economy, but what pushed us into recession can help us out. Lower oil prices now provide a welcome boost.
The U.S. Will Lead the World
Look for the U.S. to recover more quickly than the rest of the world. “Other countries are doing poorly and are behind us on the curve,” Chandler said.
Despite talk of the U.S. being in a long-term decline, Chandler sees our adversaries and competitors falling behind us.
Consider how times have changed for our oil-rich adversaries. On the eve of the Summer Olympics, Russia invaded Georgia and Venezuela and Iran talked about charging for oil in currencies other than the U.S. dollar. In fact, Iran was already charging Japan in yen for oil. But that was then. Now all three countries are weaker. Russia has lost one-third of its currency reserves since August. “Now Russia cannot project its power like it could at $140 or $150 a barrel,” said Chandler.
As for Europe, “Some say the euro zone will eat our lunch,” Chandler said. But he disagrees. He thinks it’s more likely that the euro zone will break up. He pointed to the fact that countries like Spain, Portugal, and Greece must currently pay higher interest rates than Germany. This reflects a lack of confidence in the credibility of the euro-zone and the idea that one monetary policy fits everybody, said Chandler.
Then there’s China, which has built its success on factory wages that are only 3% of those in the U.S., according to Chandler. But “China might get old before it gets rich…. [and] China might get sick before it gets old,” he said. In other words, China faces a demographic crisis as its population ages, and it has a huge health care problem. He thinks the U.S. should push China to create unemployment compensation and national health care. Meanwhile, Chinese currency doesn’t pose a threat to the U.S. dollar because it is not convertible outside China, said Chandler.Display article as PDF for printing.
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