Bond Outlook August 13th

The recent strengthening of the USD is supposed to be the result of both light trading volumes and also of an atmosphere reflecting the idea that the US economy is in a poor shape, but so is everyone else’s. There may also be an element of reversal of the phenomenon of commodity prices rising as the USD fell. These explanations seem, however, rather inadequate reasons to suppose a fundamental change in the outlook for the US economy and currency. What the surprise USD rebound does bring home is that rebalancing of the world’s economy cannot be described simply as a steady shift of economic strength from the US to Asia and other emerging markets, with Europe remaining more or less unscathed. During this process, almost everyone is getting hurt by the reduction of the USA’s spending power, and there will be many ups and downs.

Nevertheless, the above simplistic view of the shift in economic power remains reasonably correct over the long run (measured in years) and is worth reviewing again even as currencies and stock markets pass thorough a period of turbulence:

• The USA is overextended in almost every regard: in government debt, household debt, national debt, and militarily.