America: boom or bust?
A look into the effect the current U.S. fiscal stimulus package is having on the world and its associated risks
Reading up on what the freight industry is currently doing may not be part of your morning coffee routine, but a recent graph of one of the freight indices made me sit up and take note. The Shanghai freight index, graph shown below, is an indicator of the cost of transporting an outbound container from Shanghai to the rest of the world.
Last year the index rose on the back of restocking of global supply chains post the initial lockdowns. No surprises there. However, the upward trend has continued unabated throughout the first half of 2021.
There’s a myriad of hurdles the freight industry has had to face post lockdown (reduced staff load working at the docks, empty containers lying all over the world, not enough cargo ships, Suez canal blockage earlier in the year et cetera). However, there is a strong argument to be made that the actual root of these inflated freight prices is as a result of massive stimulus packages being introduced by governments, in particular the United States, which is fueling consumer demand. Freight costs have skyrocketed yet stock inventory is not growing. This means that goods are being sold in the US. To counter this insatiable demand, new container ships and containers are being ordered and freight companies are re-routing larger container ships away from developing countries towards the U.S. This has made me start to wonder:
Are we not in another boom-and-bust cycle? Is this freight scenario poised to occur in the broader economy?
One can’t help but think that the current level of fiscal stimuli will have to be curtailed at some point and whether or not his will coincide neatly with when new container ships and containers come online. A collapse in demand at a time of maximum supply.
Consider that the current U.S. public debt expressed in terms of the amount attributable to each citizen, or debt per capita, is roughly USD 81 000. Five years ago, this figure was circa USD 60 000 and ten years ago, this figure was USD 50 000, post the global financial crisis. Similarly, the U.S. debt to GDP is currently at 129%, five years ago it was 104% and ten years ago it was 92%.
And looking at the U.S. GDP figures and projections below, one starts to wonder:
How much of the U.S. GDP is actual growth, and how much is artificial as a result of the stimulus itself?
At some stage the supply of money must end and the demand for consumer goods will slow and GDP growth will stall, and we may find a recession suddenly upon us. The usual fiscal tools normally advocated to solve just such a problem, would have been the root cause to start off with and thus begs the question: What will be done?
One also needs to grasp where the money the governments are borrowing is being deployed into or towards. No doubt a significant portion will be deployed into infrastructure which will in turn benefit future generations to come, increase productivity, competitiveness and improve national security. The problem lies in what proportion of the money borrowed is flowing into consumer goods offering little or no future value. Given the freight crisis the world is currently experiencing, a lot it would seem.
Not living in the United States, why does this concern me? There is a saying that if the United States sneezes the rest of the world catches a cold. A major recession in the U.S. will have long lasting effects for the rest of the world, many of whom currently find themselves in an equally if not more compromised financial position. The situation at a country level is very much more complex than a freight index, but the same rules ultimately apply.
Outside of a major recession, inflation may be the other alternative because at some stage all the additional dollars printed will result in the dollar being worth less.
The long and the short of a boom-and-bust cycle it is that the man in the street will feel a decrease in their quality of life and future generations will enjoy less certainty.
