Trying to figure out what is going to happen next in the world is one of the most fascinating things. What is going to happen to the climate, technology, real estate, the economy?

One of my friends in Canberra talks about “fatigue syndrome”. Just put the word “fatigue” at the back of a topic of significant media attention – Iraq Fatigue, Climate Change Fatigue etc and that is what we all have. These are the things that people generally have given up on thinking they can do anything about, and they just sit back wating for the next thing to happen to them – rather than being active participants.

Anyone who regularly reads this blog would know that I read Stephen Roach's weekly macro economic view (Roach is the chief economist at Morgan Stanley).

The issue these days is to figure out how the various key vectors play out together. And what I find amazing is that people generally seem to think that things happen by accident without any human intervention.

To me the reality is quite different. And that is why we things like central bankers trying to adjust the levers to adapt to change. And of course we also have a whole lot of other agendas that creep into the equation too.

Here are some that are occurring now that fascinate me…

In the US there are coming mid-term elections. It appears from what I am reading that the Republicans are concerned that the President's current low approval ratings are going to hit them badly. i.e. some or many of the incumbents will not get re-elected because of this. One of the ways for them to change the picture as it were seems to be to bash China. And so there is a substantial push in Washington, it appears, to introduce tarriffs on Chinese goods. There is also a trend in Washington to bash the big oil companies because of the huge profits that they are currently reaping.

At the same time we have Washington beating the war drums about Iran. And leaking documents about hypothetical war/attack plans. Now we all surely must know that if there was an attack on Iran, it would do a couple of things very quickly. It would cause the price of oil to skyrocket, which in turn would increase yet again the profits of the oil companies. It would also create a massive inflationary push. It would in turn almost certainly cause as a by product a decrease in spending by the US consumer, which in turn would cause there to be a rout of the dollar, which in turn would mean increases in US interest rates, which in turn would see the housing bubble in the US burst and create the untold havoc in global financial markets. Of course none of that means that we should rule out this taking place.

Roach reckons that the US dollar is going to take a beating one way or another over the next year. I happen to believe he is right.

What happens to the Australia dollar? The Reserve Bank there has just lifted interest rates by a quarter percent. The problem for Australia is that its economy is almost totally reliant on resources. Back in the 60's Australia rode to riches on wool, wheat, iron ore and gold pretty much. Then when Labour got into power there was a massive investment in innovation and technology, and for a few years the country looked like it would transition into the 21st Century without being reliant on resources. Over the last 10 years or so the Howard government has turned back the clock, though. The country is now totally dependant on uranium, wheat and other primary industry exports. (That is one reason why the recent investigation into AWB Iraq shenanigans is so important). As a result of this the country is also totally connected at the hip to the US – because all the contracts for all those resources are written in US$.

If the price of the greenback goes down, the export income goes down. And the costs of producing remain the same. Resulting in reduced profitability, unless of course like gold at the moment, the price increase outstrips the exchange variance.

If the Australian government puts up interest rates too much, they will tend to get an influx of cash that will in turn see the A$ appreciating – which again hurts export income and makes the primary producers less profitable.

At the same time this is happening China, Japan and several other nations are holding massive amounts of US currency reserves, and have been buying US debt for years. They must be using a tremendous amount of leverage themselves to try to stop the US$ from decreasing in value. Very hurtful for them if it should tank, cause then they have to take massive write downs of their dollar assets.

And meanwhile we have a hurricane season approaching (the US that is) and no additional preparedness has taken place since Katrina, from what I read. So when the next big one hits – sometime this northern summer – as it surely will, where will that leave the US government, the president, the republicans etc?

To be honest I think that the democrats and the republicans are both bereft of ideas, and leadership, just as I feel in Australia both the liberals and labour are totally without any ideas. They all talk about values – but as the lead character in V for Vendetta said, when you hear politicians talking about values you know that there is a problem.

What does all this mean?

I see all these vectors converging sometime in the next several years and there being a massive social and economic shake out. I see there being a complex mix of both inflation and deflation taking place simultaneously – dependant upon what industry sector and which country we are in. Mr Toad's wild ride.

This entry was posted on May 6, 2006 at 5:28 pm. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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