More troubling is the question mentioned above—do China's leaders really know what they are doing or are they losing their grip on reality? They may have more advanced degrees from M.I.T. than Bernanke, Draghi, Summers, Krugman and the Koch brothers combined, but they've never had any work experience in free markets, a minor problem. If they spark a deflationary contagion across Asia, their own economy could be a major victim.
And they may be getting rattled for several reasons, not the least of which is that, when it comes to the global economy, America is reasserting its position as the smartest kid in summer school. During the first decade of this century, including the years immediately following the Great Recession, China was the driving force of the global economy. Suddenly, the U.S. economy, though hardly buoyant, appears to taken over that role for the time being in Silvia's view.
America may be more immune to China's problems than other nations but, at the same time, underestimating China's long-term clout would be pure hubris. John Mauldin, another Camp Kotok attendee, noted in a piece this week that Xiaomi, a Chinese tech company, is now surpassing Apple in domestic smart phone sales. Xiaomi is also viewed as a serious threat to several fast-growing U.S. semiconductor manufacturers.
Could a strong dollar and weak euro jumpstart the moribund European economy? Only at the margins. “Their problems are political,” Eisenbeis says. It’s true that cheap oil will benefit Europe, but nations like France seem more obsessed with suffocating growth businesses like Uber than in promoting growth. England, which refused to join the euro, is set to surpass France as the eurozone’s second largest economy despite having 20 million fewer people.
It’s little surprise that many European companies are trying to get out of Europe, and they are not alone. Mercedes, Toyota and Honda are producing more cars here so things have a way of evening out. Indeed, Silvia says European exports could also be at risk.
Still, the real game-changer is the price of energy, and that’s permanent in Eisenbeis’s view. It’s also unambiguously good for America, increasing real income while leaving the country far less vulnerable to dictators in places we’d prefer not to deal with. Some observers now think $30 a barrel oil is real possibility.
Lower gas prices are often compared to tax cuts, putting more money in consumers’ wallets even if they don't get a pay raise. But it's almost one year since oil prices began their descent, and Americans haven’t spent it. Many of them still don’t believe cheap oil is permanent. The same thing happened when Congress enacted numerous temporary one-time tax cuts during the Bush administration and the Obama stimulus. The emerging global energy glut appears to be different, though convincing consumers it is permanent could be a tough sell.
Eisenbeis sees few negatives on the horizon and most are potential ones. “The weaker the rest of the world is relative to us, the greater the demand for the dollar and U.S.-centric activities,” he says.
He didn't say it, but some similarities between China's current predicament and Thailand's baht crisis in 1998 are starting to surface. Back then, the S&P 500 briefly corrected about 19% but commodities collapsed as the dollar surged and the U.S. economy sailed along in its longest expansion in modern times, despite complaints from CEOs about currency translation woes. China, of course, is a much bigger player today than Thailand was then.
What else could upset the apple cart? “The big risk is that the Fed doesn’t normalize policy and things get out of balance,” Eisenbeis warns.