Do World Economies Revolve Around The US?

August 22, 2008 | By | Reply More

We in the West still suffer from the belief that the world economies revolve around us so when we suffer then so will the rest of the globe.

Not so long ago this was undeniably true but things have changed. The US is no longer the overwhelmingly dominant driver of world trade with Europe being dragged along on its’ coat tails.

That position has been steadily undermined since the turn of the millennium, arguably earlier, as a consequence of fiscal and political incompetence at the same time as the BRIC nations and oil producing nations have grown in economic strength.

 

It is with this reason that we are not convinced that a global recession is imminent

To state the obvious, the US and other Western economies are living on borrowed money, that is they are highly leveraged and have thus allowed themselves to become extremely vulnerable to both internal and external situations outside their control. Oil being the dominant external factor and the housing bust and personal debt being the internal factors that has led to the present recessionary climate.

At the same time the BRIC nations, along with the oil producers, are awash with US dollars. More are being printed daily, all with absolutely no backing other than the governments promise to repay. You may well ask –with what?

What is more the citizens of these emerging countries are in the saving habit, unlike their Western counterparts whose personal debt is obscenely high and whose only hope of repaying might be if their governments allowed inflation to follow the same path as Mr. Mugabe’s Zimbabwe!

Despite the writing being on the wall for the diminishing world economic status of the US, it still remains the single most influential driver of global economic activity and is likely to hold on to that position for a few more years yet.

  • The first question to address as recession looms is will it be world wide?

For the reasons given above we do not expect it to develop outside the US and other Western developed economies.

  • The second question is by how much will BRIC and oil producing countries suffer as the West falls deeper and deeper into the recessionary trough?

Undoubtedly these economies will not escape unscathed but we believe that their currency reserves and industrial activity will serve at least two purposes.

They now have available all the resources that they require to modernize their internal infrastructure and their growing middle classes have the cash to support ongoing growth in services and amenities to Western standards.

The mountains of dollars they have accumulated over the years now puts their sovereign growth funds in the pole position to buy up or take control of many strategic US and European businesses that are or will fall on hard times as the recession takes its’ toll.

When the inevitable upturn in the economic cycle takes place we are likely to see a very different picture in terms of ownership of today’s’ major corporations, particularly in the finance sector that has been responsible for so much that is now becoming detrimental to our standard of living.

With this in mind there are a number of principles that investors should adhere to as recession bites and we have compiled a list of tips on how to invest during a global recession which you should consider.

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Category: Investment Research

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