Expert Witness Blog
In Are We Nearing a Global Turning Point?, business expert witness Douglas E. Johnston writes:
Several important economic factors appear to be moving unfavorably for the US at the moment, both domestically and abroad, and there are increasing indications that America may not be able to orchestrate a hoped-for global resurgence on its own. Despite encouraging signs of domestic recovery, fundamental structural problems persist in the US economy. The National Debt now exceeds $18 Trillion, the Department of Agriculture confirms that well over 46 million Americans continue on food stamps, and key voices have stepped forward asking for a deeper look at several U.S. economic statistics….
Mathematically, the odds are very strong that a global realignment of the dollar, euro and yuan and their relative weighting and exchange rates will occur, and possibly soon. Why? Because despite the brave declarations of economic recovery from global leaders, each of them has very capable advisors who understand the reality that the entire planet is daily sinking deeper into depression. The Baltic Dry Index, long noted as a reliable surrogate statistic for the volume of global shipping trade, has reached an all-time low in February 2015. It is increasingly possible that the passage of time plus continued money printing from central banks may no longer produce reliable global economic growth.
With the vaunted Chinese economy weakening to its slowest growth rate in 24 years, with Japan (the world’s #3 economy) now shrinking at 1.2% per year, with Russia now contracting 10% or more under new economic sanctions, with Europe in steep recession, and with oil and many global commodity prices now in free-fall, the allegedly-recovering US economy and its targeted 3.5% growth rate for 2015 are being touted yet again as the growth engine for the world. As we look at the increasingly-frequent negative revisions from the BLS, Commerce Department and others regarding broad economic activity, employment rates, durable goods orders, and housing, the repeat image of the ‘US as Economic Locomotive to the World’ might be a little more far-fetched this time around. The problem is global, and the US is huffing and puffing but maybe no longer powerful enough to pull a growth train of debt-laden railcars, with some of them now moving in reverse. As Canadian Finance Minister Joe Oliver recently noted, the US ability to carry the world economy “is simply not sustainable.”
Global growth has always been the answer to the debt problem, but the idea of more and more money-printing bailouts to ‘buy time’ for the world economy to heal may have been an overworked solution for many years now. As former PIMCO Co-Founder Bill Gross (now with Janus Capital) wrote in his January Investment Outlook:
The power of additional and cheaper credit to add to economic growth
and financial asset bull markets has been underappreciated by investors
since 1981…There comes a time, however, when zero-based, and in some
cases negative yields, fail to generate sufficient economic growth…
The good times are over….The time for risk-taking has passed.
The European Union Times recently quoted the McKinsey Global Infrastructure Report in noting that global debt has grown by 40% from $142 Trillion in 2007 to $199 Trillion in 2014. But global economic growth has not kept pace, indicating that the higher debt levels will be even harder to service. While additional trillions in bailouts, global central bank money-printing and QE announcements still offer very welcome news headlines to markets in the short term, perhaps the smart money now acknowledges that target 3.5% US growth forecasts may not come even close to providing the ‘escape velocity’ to overcome this added debt load, or to pull the global economy out of the looming debt problems and core mathematics.
Can lower crude oil prices provide the missing global growth stimulus? Undoubtedly, the broad stimulus of the recent 60% decline in global crude prices over the last 8 months will provide both relief and a small boost to the common man at the gas pump, but the losers on the other side of the oil price equation are powerful companies, banks and countries which have a tighter economic nexus. Their concentrated losses could have a more impactful and disproportionately large effect on global markets, especially in the financial derivatives area, as compared to the more widely-scattered gains of the average man in the street. We will see. The quadrillion dollar derivatives market has yet to be fully understood by many.
But lastly, what again about the recent ‘good news’ of the steadily surging dollar? There seems to be little real relief there either, as the other side of the stronger dollar is that it makes precious US exports more expensive and thus less competitive in global markets. As Caterpillar CEO Doug Oberhelman carefully noted last week: “The rising dollar will not be good for U.S. manufacturing or the U.S. economy.” As the G-20 meets this week in Turkey, perhaps the world will look to other economic engines and other solutions.
Doug Johnston (through Five Management, LLC) is an expert witness in banking/lending and an investigative business consultant specializing in Commercial Banking & Lending, Private Equity, and International Banking. Early in his career he was named as the youngest bank president in Texas, and thereafter he established multiple bank offices in California and Texas. Expanding into Corporate Finance and Mergers & Acquisitions, he became a ‘Founding Father’ of the largest private company in Los Angeles. As a C Level executive, Doug has ‘hands-on’ debt and equity finance and documentation experience with both lenders and investors involving hundreds of companies engaged in technology, service, real estate, manufacturing, and entertainment across the US as well as in Europe.