US’ economic prowess set to take a hit (Pandemic will change a lot of things in world economy)

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 US’ economic prowess set to take a hit (Pandemic will change a lot of things in world economy)

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• Print more dollars: Central Bankers are heard saying this often - "The US can print any number of dollars without an extra cost". The US put this technology to great use during the global financial crisis period, 2008 onwards. It's the antidote to deflation.
• Debt-deflation theory, 1933: Irving Fisher had spoken of how great crises were created – he focused on debt and deflation more.

1. When asset prices fall, the Fed prints money to lift them
2. Soon, real yields become positive, while inflation stays at zero per cent
3. So debt keeps growing, and since it was used to buy assets, prices go beyond normal levels (due to leveraging)
4. Too much indebtedness leads to deflation

• Applying it to the stock markets: First assumption in markets is that companies have cash flows, and earnings. That is how a share price is worked out.

1. Earlier, money that could buy the shares was limited, as currencies were based on the gold standard
2. That meant that the P/E ratios were sensible
3. But with blatant printing of dollars, the P/E today is not real – there is a disconnect between the fundamentals and the price of financial instruments (shares)
4. So what runs the market? The sentiments of participants.

• Expansion of central bank balance sheet: The US Federal Reserve expanded its balance sheet till 2015, without any problem. China did the same. At the same time, the US and China remained primary and Japan, the EU and UK etc. couldn't do much.

1. US and China are tightly integrated. China's $14 trillion GDP has a $450 b US exports component.
2. Low US consumption puts China into trouble. US consumption runs on debt.
3. Total corporate debt in US is $13 trillion, of which speculative debt is 48% (for China, it is 50%)
4. EU has controlled this problem after the 2010 debt crisis
5. US and UK have "risky debt" at more than 30% of total debt - so over-indebtedness is ingrained
6. So what happens to US – will it also pay the price like other who don't own dollar as reserve currency, or large forex war chest?

• COVID-19 the trigger: This pandemic was not considered into calculation at all! But predictions are clear.

1. Deleveraging will commence, and companies will reduce debt. That can lead to deflation (Fisher's theory). So central banks will reduce rates to zero, and print more money.
2. Firms will get cheaper debt, as cash gets infused via financial markets
3. Unlimited QE is already back, as the Fed promised to pump $1.5 tr and $500 b into the markets, and the ECB too started an unlimited bond purchase programme.
4. Oil price crash has hit the shale oil producers of US & Canada, and the deep sea oil explorers of Europe hard.
5. Crude oil will be the starting point of global crisis in 2020s, like real estate was for 2007-2015.
6. Big oil consumers (India) will stock up with crude.

• US leadership under threat: Multiple factors will weaken the US now – pandemic, oil price crash, debt mismanagement (post 2015), wealth disparities, etc. Global clout of US is falling, as local populism trumps it. Power shift is imminent.
• Reserve currency: Will dollar fade away as the reserve currency for the world? Will gold become the standard again? Euro and Brexit both have failed badly, and Chinese renminbi is on the rise. Its now at 2% of global forex reserves, while US is at 62%.
• China and gold: Some speculate that China may have 4000 T of gold to back the Yuan, and may soon launch a gold-backed cryptocurrency. Since US and China are too tightly knit, the transition won't be violent! But as long as the world blames China for the COVID-19 pandemic, it will take some more time.
• Summary : A big power shift in the world is now imminent, as the US loses clout due to a mix of many major developments.

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