China Daily: It's time to take seriously a US-led global recession

[IDemo]

Lau Nai-keung

2005-10-06 07:37

I think it is time that we should take a serious look at the possibility that the US is going to take us down towards a worldwide recession in one or two year's time.

It is well known that the US is the world's biggest economy, taking up about 30 per cent of global GDP, but it is now also the world's biggest debtor country. According to the most authoritative person on this subject, the US Comptroller General David Walker, who audits the federal government's books, the tab for the long-term promises the US Government has made to creditors, retirees, veterans and the poor amounts to US$43,000 billion, US$145,000 per US citizen, or US$350,000 for every full-time worker.

And this figure does not even take into account all the personal debts such as credit card bills and mortgages. With a low interest rate of 1 per cent running for the past three years in a row, savings plummeted to just 1.8 per cent last year, below 1 per cent since January and at zero in the latest estimate from the Bureau of Economic Analysis. In 2000, household debt broke 18 per cent of disposable income for the first time in 20 years. Credit card debt alone averages US$7,200 per household.

The US Government indebtedness is financed this way: The US now runs a trade deficit roughly 6.5 per cent of its GDP and the gap is widened every day. Its citizens are spending ever more on foreign goods, and with the US dollar as the international currency, the US Government just prints money to finance the deficit. And with this money, central banks in the surplus countries purchase most of the US Treasury bonds as currency reserve.

- read more here -

[AX10]

1. 06' 07' recession is likely.

Think back to 96'- 2000 when the economy was booming.

[Vidar]

2. Telling like it is.

[ckramer]

3. What would happen to the common folks

if this was real?

[cassiepriam]

10. Something tells me nothing good would happen to us.

[stillcool]

4. scary stuff...

But in the short term, now the US not only sneezes, and all symptoms indicate that it is going to suffer from a SARS-like trouble, the whole world should take extra precaution not to get infected. One thing is for sure, some time in the not too distant future, every central bank and institutional investor is going to dump US dollar and US Treasury bonds. Once, when a country like South Korea dumps the dollar, the still unsold US Treasuries in the asset column of Asian central banks - US$2,000 billion according to some estimates - will collapse. The cheapened dollar will cause a sudden jump in the US inflation, which forces the Fed to jack up interest rates. A giant leap in inflation will cause a severe recession, or perhaps a depression, in the US. These countries' exports to America will dry up, which in turn will spread the global economic downturn like wildfire.

After the stampede, everybody is going to get hurt, not least the central bank of China, and the Hong Kong Monetary Authority, which are major US creditors and with the US as their number one export market. The recent currency reform of the RMB is most timely, and it is about time we should do something about the Hong Kong dollar. At the same time, China should make extra efforts to rekindle internal consumption, and diversify its market really fast before the great US bubble bursts.

[tularetom]

5. I don't get it

They've known this for years and yet they keep extending us credit. I could see as early as 2001 that bush was gonna run the surplus into the ground and put the country into long term debt, why couldn't the Chinese? Wouldn't make sense for them to start turning off the spigot slowly as their own internal markets develop. After all where are they gonna sell their crap when we have no money to buy it. A scary prospect, even if it does mean the end of wally world.

[wickerwoman]

6. I don't pretend to understand that much about it...

but I think the Chinese have been investing like mad in infrastructure. Something like a third of the world's construction cranes are in Shanghai alone. So even if the market crashes and there's a global depression, they still have the production capacity, the airports, etc.

And they have 1.3 billion potential customers in their own country plus they've been negotiating like mad with Africa, Australia and the EU.

I don't know if China could actually ride out a global depression, but I think they're preparing for it by developing markets in Asia and spending like there's no tomorrow (because there probably isn't.)

[cliss]

7. Yes, I see your point.

I think, though, they really didn't have much choice in the matter. China decided to start selling us low-priced goods. This has been the secret to their success.

They used basically slave labor and turned their poor country into the fastest-growing economy on earth.

Their currency was undervalued. They practically forced the U.S. to keep buying, buying, buying because the stuff was so cheap. Meanwhile, our manufacturing base vanished. They started taking more and more of our jobs.

In a sense, their success will become their failure. They have created this great business partner which has made them rich, but while they've done so, they've also impoverished their business partner. The more successful they are, the sooner will come their demise.

[cassiepriam]

11. I do know that politically China is very patient and takes the long view.

Very willing to ride thru bumps to get to their long term goal.
Very different from the US in this way.

[depakid]

8. Here's the clincher-

The article appears to be written for a Chinese audience- with the health of the Chinese economy in mind. This isn't aimed at the West for propaganda purposes:

"One thing is for sure, some time in the not too distant future, every central bank and institutional investor is going to dump US dollar and US Treasury bonds. Once, when a country like South Korea dumps the dollar, the still unsold US Treasuries in the asset column of Asian central banks - US$2,000 billion according to some estimates - will collapse.

The cheapened dollar will cause a sudden jump in the US inflation, which forces the Fed to jack up interest rates. A giant leap in inflation will cause a severe recession, or perhaps a depression, in the US. These countries' exports to America will dry up, which in turn will spread the global economic downturn like wildfire.

After the stampede, everybody is going to get hurt, not least the central bank of China, and the Hong Kong Monetary Authority, which are major US creditors and with the US as their number one export market.

The recent currency reform of the RMB is most timely, and it is about time we should do something about the Hong Kong dollar. At the same time, China should make extra efforts to rekindle internal consumption, and diversify its market really fast before the great US bubble bursts.

[Neil Lisst]

9. We will have a recession in 2006.

I agree with the article. US debt is at critical mass. The federal government and the citizenry have gone deeply in debt.

If you outgo exceeds your income, your upkeep will be your downfall.

[cassiepriam]

12. The sad part is that we did all of this to ourselves.

We have been warned and warned. And we just walk over the cliff
time and time again.