Up The Mountain at Davos

    The elites are gathering for the annual global conference in Davos, Switzerland. And, today, there's a little snippet at the Wall Street Journal's on-line edition (subscription required) that fits with what I've been saying for many months: "A gloomy forecast about the world economy greeted the leaders when Stephen S. Roach, chief economist of Morgan Stanley, said markets and officials had developed 'a dangerous degree of complacency,' assuming that an unbalanced world economy could continue without correction."

    Roach has often been somewhat of a contrarian among the investment world, penning columns and forecasts that criticize so-called "free trade" and globalization because of the growing inequalities spreading throughout the world. "Asian central banks have helped to keep things going so far by supporting the U.S. economy much longer than could be expected, Mr. Roach said. The American consumer -- both 'the weakest link' and the most important -- has continued to drive the world economy by spending, according to Mr. Roach. But the U.S. real-estate market is showing signs of slowing down, with the key indicator of home-mortgage refinancing down 45% from peak levels a year ago."

    As I pointed out a few days ago, the crisis for workers is already here--no wage gains. And it's been pretty clear that the economy has been driven by two things--huge, growing personal debt and cash people have taken out of their overvalued homes. This is coming to an end. And when it does, it will be a rough road for many people.

Comments

[patrick Slattery]

China's central bank has hinted that it will diversify its foreign exchange assets,possibly investing in global commodities,including "the barbaric metal" (Keynes' phrase),gold. Other Asian central banks are likely to follow suit.

This development will be a tipping point in the global economy. Provided this diversification of foreign exchange away from the dollar occurs slowly but steadily, with China and Asia periodically revaluing currencies upwards, the disruption to international trade patterns need not be too
destabilising. But some instability is inevitable,since it seems at times that Americans are internationally outsourcing everything but consumption, an unsustainable trend.

Inevitably,American consumption and balance of payments deficits will be reined in by a decline in the dollar that causes increased domestic inflation and increased interest rates,which leads to a slowdown in consumption.The timing of this cannot be far away,possibly a year or two. The trend to reduced economic growth in America will cause a slowdown in global growth,which, with some luck,could in turn cause international oil prices to decline precipitiously, helping to partially offset this slowdown.