The American economy is propped up by Asian central banks. In order to keep Americans spending their money on Asian goods, the central banks of Japan, China, Korea and others have purchased a stunning amount of dollar assets: $616 billion in 2003 alone, up from $351.9 billion the year before.
(But) American consumers have seen their real disposable income slowly turn downwards. In January the growth in disposable income was 5.7%. Then it began to fall, first to 4.6%, then 4.5%, 3.7%, 2.5% and down to 0.8% in July.
The fear of these Asian governments’ central banks is that if the American consumer stops purchasing, then the Asian economies investments will seem like the internet boom of the late 1990s. Much of it will go to the wall.
But this all comes on the back of an economy that is running record deficits at around $150 billion every quarter. It appears unsustainable. The most recent figures are a stunning monthly record deficit of $54 billion in August alone.
“Essentially these figures say that the levels of demand growth are unsustainable. There will not be spare capacity to maintain either growth or prices at current levels. Prices would soar.
However, there is one possibility that could restrain demand, a recession.
The only thing that could really change the equation is some kind of global recession that would dampen demand. Of course, that could be catastrophic…
The idea behind “peak oil” is this. That, as the planet reaches the halfway point of consuming all its available oil, then a combination of bullish demand, slowing fields and insurmountable supply bottlenecks will create brutal price shocks. Almost certainly slicing the head clean off the world economy in the process.
This peak in oil supply will act as an economic guillotine. Yet the thread suspending the blade above our heads will be released without warning.
Politicians, producer countries, major oil companies and consumer states are not about to announce their own demise. It would not be good for business, or re-election, or both.
“I think the peak will arrive around 2006, 2007. But, this is only 15 months away. That is all. At that point, no one can say what is going to happen. Except the price is going to go up. And no one will be able to stop it.”
update: World Bank warns Asian dollar reserves could trigger crisis (April 7, 2005)
Accumulation of dollar reserves by some Asian countries could spark a systemic foreign exchange crisis, the chief economist of the World Bank said in an interview to be published today. Some countries, particularly Asian ones, have no interest in the parities of major currencies being modified. As a result, they are financing the enormous American current account deficit.
“Today, the danger is that some dealers are starting to think they must change the rules of the game, play dollar depreciation and move towards the yen and the euro. That would confront us with a real systemic risk. Too drastic a programme would plunge the United States into recession,” Francois Bourguignon said.