The US is poised to fall behind as the world looks to recover from the economic blow dealt by one of the worst public health crises in a century.
While Hong Kong, Japan, and Spain are all coping with second (or third) virus waves, the US stands alone as the only developed nation to prove utterly incapable of controlling the spread. That casts considerable doubt not just on the nation’s path to restoring economic stability, but also on the American system more generally.
The lack of a coherent federal response led directly to absurd competition between states for scarce resources which were allocated by market forces, while citizens’ deeply ingrained distrust of government undermined the widespread adoption of simple, common sense containment measures, like face coverings at the grocery store.
Throw in rampant inequality, which was exposed and exacerbated by the crisis, and one is left to ponder the decidedly unfortunate prospect of the world’s richest country being no more capable of coping with a crisis than a developing nation like Brazil.
This is feeding back into US dollar weakness, and it’s important to understand how.
As states representing more than 80% of US GDP pause the re-opening push, US economic underperformance vis-à-vis China and the developed world begins to seem like a foregone conclusion.
Say what you will about the reliability of the numbers, but China is ostensibly on the path to a quick recovery. Data out Monday showed industrial profits rising a second straight month (figure below). The world’s second largest economy grew in the second quarter, as “first in, first out” appears to be applicable to pandemics. PMIs for July are up next.
Europe, like China, adopted stricter lockdown measures than the US and that may be helping the recovery along now that restrictions have been lifted.
German business confidence improved again in July. Ifo’s business climate gauge rose above 90, and the expectations index jumped to 97, the best reading since late 2018.
It’s important to keep perspective. “Before drifting away in too much enthusiasm, it would be a huge surprise if the German economy could maintain the growth momentum of the first months after the lockdowns”, ING said. “We are currently in a mechanical rebound and the real face of the recovery will only become clear in the coming months”.
Still, Germany’s success in controlling the virus is enviable (unfortunate circumstances at some meatpacking facilities notwithstanding).
“Crucial for a sustainable recovery is confidence that the virus is no longer out of control, and Europe’s relative success may help encourage shoppers to spend and businesses to invest, further propelling demand and growth”, Bloomberg wrote over the weekend, adding that “the region has also done a better job of protecting jobs and incomes, at least for now, with furlough programs keeping millions of workers on payrolls”.
That latter point is critical too. The European system is better equipped to shield workers than America’s increasingly archaic dog-eat-dog economy, which has evolved (or perhaps “devolved” is better) to the point where Jeff Bezos makes or loses enough during a single day (depending on how Amazon’s stock trades), to cover the entire net worth of the biggest names in finance. For example, last Monday, Bezos made roughly 6.5 times the entire net worth of “bond king” Jeff Gundlach during US trading hours. If Amazon were to slip after earnings this week, he’ll surely lose multiple Gundlachs the next day.
If the US does end up underperforming in the quarters and years ahead, it will mark a break with precedent.
The more pervasive the virus — the longer it takes for the US to get the situation under control — the more fiscal stimulus the market will expect. That entails wider deficits and also presages a prolonged period of low rates and asset purchases from the Fed, which will need to accommodate government spending.
Those expectations are weighing on the dollar, and don’t think it’s entirely lost on savvy market participants that not all Americans will be inclined to get a COVID-19 vaccine assuming one becomes available. That is yet another manifestation of US citizens’ inclination towards conspiracy theories and mindless allegiance to nebulous notions of “liberty” and personal choice overriding common sense, to the detriment of their fellow countrymen and women.
Meanwhile, it’s extraordinary that European leaders representing countries which, in some cases, are on diametrically opposed fiscal paths, were able to come together in the face of a crisis to craft a jointly guaranteed recovery fund, while Republicans and Democrats in Washington continue to behave as though they don’t ultimately represent the same constituency — namely, Americans.
If the US empire was already on the downward slope of its growth-decline curve, the country is now at risk of taking the elevator to the bottom as opposed to a more gentle (and dignified) ride down the escalator.
I’d say it’s not too late to turn it around, but the last three months suggest otherwise.