The Bureau of Economic Analysis (BEA) released advanced data for the 4th quarter of 2011. US economy expanded in real terms by 2.8 per cent from the preceding quarter and by 1.7 per cent for all of 2011 per our forecast. Whether this recovery can be self-sustaining will come to relief in 2012 because of the Fed’s appropriate and continued commitment to expand money supply through late-2014 signaling the presence of some uncertainties.
The price of economic recovery, as measured by one metric, is $3 billion in money supply for every 1 point rise in the Dow Jones Industrial Average (DJIA) from its low of 6500 to its high of around 13000 between 2007 and now, motivating the people of the United States and the president to call for more resources to investigate financial fraud in the markets.
The 2011 growth rate of 1.7 per cent subscribes to standard economic theory after a deep recession: economic growth initially rises sharply upon recovery and then falls to stabilize at a lower level. It is our view that the steady state annual growth rate, given the existing economic structure, is between 1.5 and 2.5 per cent.
Quarter 4 of 2011, from October to December, saw encouraging signs to increase domestic investment:
(a) Bi-partisan US deficit financing commitment through 2013.
(b) Withdrawal of US forces from Iraq.
(c) Commitment to withdraw US forces from Afghanistan by 2014.
(d) Slowing growth in the emerging markets, primarily China and India, to alleviate price pressures on food, energy, and other commodities.
(e) Euro troubles.
(f) Rising Chinese export prices to enable import substitution by the United States for raising US exports.
(g) Middle East and North Africa (MENA) stabilizing after the Arab Spring, whether that process is entirely to the liking of the United States or not at the moment.
Investor bias is once again in favor of the United States.
Holding the above conditions steady is critical for continued US and global economic stability and growth in 2012. Expectations of geopolitical, monetary and fiscal stability always improve the economic prospects of nations, except clearly defined short war engagements which can raise economic growth.
The January 25, 2012 release of Federal Reserve interest rate forecast conveys a gradually strengthening sentiment among monetary policy makers, in the backdrop of the usually long fiscal lags associated with any budget or government reforms, to raise the federal funds rate by 2016 to a level of self-sustaining monetary accommodation greater than 0 per cent but about equal to a growth rate of no higher 3 per cent.
Faster global structural change to lower energy consumption and, hence, inflation in the long (2016) to very long run (2022) is not to be expected in the present policy environment. Food price inflation is a function of global food consumption and growth. There is no reason why emerging market populations should be expected to lower demand for food to prevent the type of circumstances which existed in the run up to the 2007 recession to accommodate full US and EU recoveries to stable prices and full employment. Emerging market governments are incurring fiscal deficits to subsidize food prices in their period of moderating growth. It is, therefore, best for the G20 group of countries to each focus on their robust recoveries by adopting the proper policies rather than reactive myopic measures to avert military or economic conflicts by maintaining the status quo.
It is our recommendation to China and India in particular to begin the process of delinking from the US dollar and the rest of the G7 currency basket without which American growth will have to slow from the 2.8 per cent of 2011 Q4 back down to an annual average of 1.5 by end-2012 to prevent China and India from sinking into a recession, depressing wages and increasing wage inequality in the United States to maintain the transparent numerical price stability target commitments of the G7. It is clear that the Federal Reserve is unwilling to tolerate higher than 2 per cent inflation for the purpose of maintaining a real equilibrium interest rate of close to zero.
The prospect of US growth slowing once again may not be palatable to US policymakers in the period 2012-2016, driving foreign institutional and direct investors (FII and FDI) out of China and India to trigger the next Asian crisis: the quid pro quo to US financial markets from any US administration, Democrat or Republican, especially from budget and tax reforms, appears to be higher domestic investment.
The United States and the European Union must immediately begin accepting from Brazil, Russia, India and China (BRIC) their currencies for export payments and investment and vice versa to commence the transition toward adding 4 more currencies to the floating exchange rate system by 2022 and to permit some retraction of the US dollar from global trade.