Howard’s End: US Economy To Hit Wall
Oil analysts are predicting a $US40 per barrel price in coming weeks which would represent of 400% price rise since March 1999. Yet the US economy and financial markets are reacting as if it didn't exist. What's going on? John Howard writes.
Wall Street firms, including Merrill Lynch and Goldman Sachs, say we can expect $40 per barrel oil prices in coming weeks unless something dramatic happens.
From a global standpoint, Americans seem remarkable: they apparently don't use energy to fuel their cars or airplanes; nor, apparently do they eat food.
How else could the US Federal Reserve claim, month after month in the face of soaring commodity prices, that something the Fed defines as "core inflation" remains "under control."
And this while European governments are reporting rates of inflation heading towards 10% annualised.
"Core Inflation is Born" - The US Federal Reserve, official calculator of the monthly Consumer Price Index (CPI) releases a measure that it calls "core inflation."
This is defined as consumer price inflation, but, remarkably, minus inflation in energy and food. The current core inflation level is 2.3% - hardly grounds for panic.
Core inflation for the past 18 months, when oil prices were shooting through the roof, has remained "mild" according to the Federal Reserve statisticians.
The source of this miraculous statistical event had its origins back in 1973-74 during the Nixon presidency. Then, as now, it was a huge spike in oil prices which was at the heart of dramatically rising prices.
When oil prices rose 400% within months, the Fed decided to strip the impact of the oil price rises out of the CPI. At the time it said " It is exogenous; it has nothing to do with the inherent tendencies of the US business cycle."
But what the Fed did by removing oil price rises was to surgically remove the diseased slice of the CPI.
However, the elimination of energy inflation from the CPI wasn't enough.
A few months later, under severe US drought conditions and record grain exports to the Soviet Union, food prices also exploded.
Simple solution - the Fed can't react to weather conditions so take food out of the CPI as well.
But based on today's weights, those excluded items would amount to 50% of the goods and services that comprise the so-called CPI basket.
So what is the reality?
When we strip away the politically motivated core inflation nonsense and look at the real prices of a market basket of goods and services, real US CPI inflation levels are running around the same levels as Europe - about 10%.
According to data compiled by the American Purchasing Magazine, prices paid by manufacturers for primary and semi-finished goods have risen by anywhere between 10% and 50% betwen May 1999 - May 2000.
Hot-rolled steel rose 20% - stainless steel 16% - aluminium ingots 17% - copper wire 27% - paper pulp 67% - chlorine 55% - sulphuric acid 37%.
This does not include the impact of the 400% rise in crude oil to prices of petrochemicals across the spectrum.
Similarly, in western Europe, inflation is serious.
The German Federal Statistics Bureau has reported that the Wholesale Price Index shows dramatic increases between 1999/2000.
Heating oil rose 55.8% - aluminium 24% - copper 13% - pork 12% - tomatoes 11% - and fish 22%.
So long as you don't need food or energy (petrol, electricity, fuel oil, propane, diesel, natural gas) or anything made with energy, you don't have to worry about rising prices - only in America.
Yet the international theme also seems to be "let the good times roll."
It's often said that the US is the engine room of the world's economy but it is also the world's largest debtor. As a percentage for every dollar of GDP there is nearly $3 of debt.
But it is the number-one country upon which East Asian countries depend to sell their exports and that's Asia big problem.
Would the US cooperate if there was a global financial catastrophe, or would the Association of Southeast Asian Nations plus Japan, South Korean and China (ASEAN+3)have the courage to establish its own trading system?
The whole of the US economy is wallowing in debt and its stock exchange is way over-valued so it's easy to imagine a scenario in which global confidence in the US dollar quickly eroded.
According to the Federal Reserve total interest bearing debt in the US is $25.6 trillion; GDP is $9.5 trillion; therefore, there is $2.69 of debt for every dollar in goods and services - the worst in US history.
If the US economy is so strong and productive why does it take $2.69 in debt to produce $1 dollar in goods and services?
Perhaps its because the economic strength is only skin-deep and below the surface it harbours severe weaknesses.
The $4.5 trillion (67%) increase in borrowing over the past five years is the explanation for the stock market bubble. History shows that you can't have a stock bubble without a credit bubble and you can't have a credit bubble without a promiscuous Federal Reserve.
Most Americans now have household debt at 101% of income - up from 84% in 1990.
According to the US Bureau of Economic Analysts the personal savings rate of Americans has gone negative - less than zero.
So where does all this leave us?
With the biggest, fastest growing debt bubble in world history in the US; with the greatest number of Americans holding the greatest amount of household/personal debt in US history alarms bells should be ringing globally.
The Wall Street Journal summed it up this way - " Alarm bells are starting to ring and not just because borrowings are at record levels. Adding to concerns is the fact that companies and consumers who may be least able to afford more debt have been adding the most to their borrowings. If the economy turns down, many of the loans could go bad."
A US presidential election is looming just weeks away. Historically, such years are boom years as the incumbent administration pumps up the economy, the money supply and the financial markets.
But already there are signs of recession in the US economy.
Rising prices, rising interest rates, corporate earnings starting to turn down, (19% of the S&P 500 have reported sharply lower earnings), and a faltering stock-market especially in the high-tech area.
The American consumer is maxed out on debt and is struggling to make debt service payments, hence consumer spending is slowing.
Right after the US presidential election I am predicting a controlled recession - a controlled releasing of the air from the bubble, but will it stay controlled?
In which case there is another scenario - that historical economic saviour - war.
I don't want to be a kill-joy about the global good times rolling on, but it's been well said that America sneezes and the rest of the world catches pneumonia.