The Chinese and other Asian economies are slowing and the effects will be felt right here is the USA. Unlike Las Vegas, what happens in Asia does not stay in Asia. This writer´s father was just starting out as a small town Midwestern businessman when the stock market crashed in 1929. He recalled that the immediate consensus on Main Street was that New York was far away and what happened there would not affect the heartland. That first take on the 1929 crash was wrong and should provide a little insight for investors in a world that is much more interconnected than it was 86 years ago. Our concern for the US economy and American stocks is that what happens in Asia does not stay in Asia.
Is Recession on the Horizon?
Foreign Policy asks if China is about to plunge the world into recession. Here are a few comments from the article.
>Global markets have appeared rattled, with major media outlets repeatedly invoking the specter of financial “contagion” from falling Chinese stocks and with major equity indices of the world’s biggest economies mostly retrenching in the days following the recent RMB devaluation. How real is the threat of a global recession led by a deteriorating Chinese economy? Foreign Policy asked several experts to respond to the recent hand-wringing.
>It puts especially severe pressures on resource-based economies (such as Australia, Brazil, and Canada) as well as on producers of components and parts (largely in East Asia) that drive exports through China-centric supply chains. The sharp correction in global commodity prices is a direct outgrowth of the cumulative weakening in China’s old model of commodity-intensive economic activity.
>China’s over-investment boom inflated the price of inputs like copper, iron ore, and oil – but it deflated the price of all kinds of finished goods.
>A recession with Chinese characteristics thus looks like one we’ve feared off and on since the 1930s: deflation triggered by beggar-thy-neighbor behavior. It wouldn’t be as sharp as the Depression but would have multiple similarities: a major producer (United States then, China now) reacts to a bubble popping by trying to squeeze gains out of its trade partners. Seeing as they are already running large deficits with this large and suddenly irresponsible actor, the trade partners show no hesitation in retaliating. And off we go – though again, not in the same devastating fashion as the 1930’s.
It appears that what happens in Asia does not stay in Asia, but:
How Bad Could It Be?
Perhaps a recession caused by Chinese economic contraction will not be as bad as the Great Depression or even the Great Recession but don´t say that to commodity exporters like Australia, Brazil or Canada. We recently wrote about the declining fortunes of the BRICS nations, China included. A well-made point in the Foreign Policy article is that not all growth is good growth. Too many countries became too dependent on rapid and continued Chinese growth. Their investments were over-extended just like those of the Chinese. What happens in Asia does not stay in Asia and this fact is coming home to roost with recession in commodity driven economies across the globe. How does this effect US stocks and the economy?
A US Recession
The Wall Street Journal quotes former Fed chairman Bernanke as saying that the US is unprepared for the next recession.
Historically, the U.S. economy suffers a recession every five to eight years, so given that our recovery is more than six years old, we may face a downturn soon.
And with monetary policy already in heavy-easing mode and fiscal policy hamstrung by the government’s massive debt burden, the government’s tools to combat any downturn are limited.
“As the U.S. economic expansion ages and clouds gather overseas, policy makers worry about recession. The concern isn’t that a downturn is imminent, but whether they will have firepower to fight back when one does arrive.
Former Fed Chairman Ben Bernanke is concerned too, though he’s not panicking. The government’s weapons to fight the next recession will be “more limited than usual, but they’re not zero by any means,” he told the paper.
Should we expect several more years of quantitative easing, money coming off the printing presses in the trillions and a weaker dollar in an effort to avoid a deflationary spiral?