If you know me, economically speaking, then you know that I'm a strong follower of Nouriel Roubini and Meredith Whitney. Both tends to be relatively bearish, although I agree with them that its more realistic than pessimistic, but both also correctly foresaw the housing collapse that predated the Great Recession. So when both of them appeared with comments on the economy and Chinese unpegging of the yuan, I listened and now defer:
(1) As Roubini has recently explained...since late 2008, China had pegged the value of its currency to that of the US dollar, essentially meaning that as the dollar declined or rose in value, so to did the yuan, proportionally. The effect -- US goods could not becomes significant cheaper to Chinese consumers or others -- which would effectively improve the US economy but also steal China's only true economy, which is the exporting of goods to Europe, and the US. China's willingness to "unpeg" its currency means that, in the short term, its value should STRENGTHEN against the dollar. Why? Because China isn't in debt like we are and is a much stronger country fundamentally economically speaking. What that also means is that Chinese consumers (and there are tonssssss of them) now have stronger purchasing power for US goods. The idea being that they can buy more US goods and US exports and economy will benefit. You can see why the US has asked for this the past 12 months and the market rallied on this news alone earlier today.
The potential problem -- China is very tied to Europe for exports. So, if the European sovereign debt issues re-rear later this summer or at any point, the Euro economy will suffer, which means that the Chinese economy could suffer. Also keep in mind that China's housing market was eerily similar just months ago to the US's 2007 version. Attempts have been made to deflate the bubble and they are helping, but can a government ever truly deflate a bubble in a predictable and calm manner? So if China (the engine of global growth these days) find itself with a slower economy, the possibility exists that the US dollar will then strengthen as it becomes a strong safe haven for investment and one of last resort. That in turn would mean the exact opposite for US exporting goods and global purchasing power. Then again, at least debt payments would be cheaper!
(2) Meredith Whitney was a co-host on CNBC this morning and reiterated her comments that the US will experience very slow GDP growth for the 2nd half of 2010. Growth of 2% or less. Again, growth is growth, and that is positive but specifically, she cites continued consumer debt issues, a guaranteed housing double dip (due to accelerated foreclosure efforts, short sales, dips in pricing, over-inventory, and no more tax credits), restricted state and local govt budgets that will require additional layoffs, and continued credit constriction to small business as her reasons. And realistically speaking - many economists agree. Again, its not another recession, but below 2% GDP growth will feel like one and unemployment should continue to remain stagnant at its elevated levels. One interesting note from Whitney -- she attributed some of the recent US growth to consumer spending that she never would have expected .... spending that consumers had because they stopped paying their mortgages when their house was underwater in value. Many articles have been written on this -- essentially, it equates to consumers kicking the can down the road and enjoying current prosperity at the cost of tomorrow.
Sound familiar? Cash for clunkers. First time home buyer tax credits. Eco friendly appliance tax credits. Fed/state-sponsored kitchen rebates/credits. 5.9% 4th quarter 2010 GDP.
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