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Summer 2014

America's Global Withdrawal

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Rising and falling of empires

Reader comment on: Inflation Around the Bend?

Submitted by Jacq Krol (Netherlands), Jun 14, 2009 04:49

As always it is difficult in economics to make a proper analysis due to ceteris paribus conditions. If we isolate US economy from the rest of the world the analysis makes certainly sense: more governement debt induces lower spending and investing and thus lower interest rates and prices. However we live in a world where billion of new consuments are awaking. These people have no debts and their spending level will rise coming years. This will put a pressure on global prices of natural resources. This cost inflation will hurt most those economies where the huge debt puts a downturn on economic activities. All things that are not neccessary becomes cheap in these economies (in fact shrinking spending generates a negative multiplier effect), but things one really needs become expensive. This is nothing more than a falling level of prosperity for those with huge debts. The micro and macro analysis have the same results for debt.

At the same time foreign investors will allocate more in the growth regions of the world, and making it more expensive for those huge debt nations to find finance. An investor is not willing to finance at low rates those nations whose prosperity will fall if there are good alternatives.

US will no longer be the center of gravity for the world economy, this center will move to the east in the next years, and US will face rising interest rate, cost inflation and as a result a falling level of prosperity. For an investor there are three themes: long natural resources, long Asia ex Japan, short US gov bond.

So, that is nice to economy you can have completely opposite conclusions. But comparing past periods with current periods is very dangerous to support conclusions since you often compare apples with peers.

Jacq Krol,

The Netherlands


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Other reader comments on this item

TitleByDate

⇒ Rising and falling of empires [302 words]

Jacq Krol 

Jun 14, 2009 04:49

  inflation around the bend [5 words]

AndrĂ© Pouw 

Jul 5, 2011 11:16

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