Is the United States the Rising Phoenix of the Financial Crisis?


Following almost two days’ worth of bearish sentiment about Western economies at the fourth annual CFA Institute European Investment Conference in Paris, at least one speaker is taking a decidedly contrarian position. Charles Dumas, Chief Economist of Lombard Street Research, said that in 2013 the place to invest will be the United States, not China. His thesis represents a provocative twist on the prevailing paradigm: that China is the growth engine of the future and the United States is poised for a decade of stagnation.

Although Dumas’ views on future economic growth are anything but mainstream, he agrees with many economists who believe that the credit crisis was caused by a massive global imbalance triggered by Western economies spending too much and Asian economies (namely China) saving the balance. This massive current account imbalance helped create easy credit, asset bubbles, and ultimately a global financial crisis.

Although the U.S. government stabilized its economy this year, 2012 will be tough for three main reasons:

  • The government is poised to make deep spending cuts;
  • The expiration of the temporary payroll tax will lower disposable income by 1%;
  • Capital spending will decrease because tax breaks pulled demand forward into 2011.

As a result of these factors, 2012 will likely be a very weak year for the U.S. economy, Dumas explained. The good news is that current deflationary pressures and increasing savings will have long-term positive effects in that these trends will help the United States’ current account deficit move towards zero, he added. And that brings us to Dumas’ contrarian thesis: that the U.S. economy will show signs of life in 2013 and be worthy of investment.

Still, for his scenario to play out, China — the largest net exporter — must experience the opposite phenomenon. China’s growing economy suffered inflationary pressures that were actually exacerbated by U.S. Federal Reserve chairman Ben Bernanke’s policy of quantitative easing, Dumas contended. These inflationary pressures in China coupled with deflation in the United States triggered a reversal of the bilateral trade imbalance. An export-driven economy is not a sustainable model for China, Dumas added, especially since the country’s two largest customers — the United States and the eurozone — are increasing their savings rates. Dumas contended that China is going to have to restructure its economy to be more consumer-driven, and that will help reduce China’s massive trade surplus even more.

The effects of this transition, Dumas argued, will slow economic expansion in China. The era of 10% growth in that country will be over, he believes, causing investors to rethink their global allocations and look more favorably on U.S. assets.

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