Sunday, August 06, 2006

Decoupling from American Economy?

There has been renewed debate about Economy and Recession. American GDP slowed down from 5+% to 2.8% in the second quarter and early numbers for the 3rd quarter do not look promising.

Many say it is unlikely that anything useful can be done by American Government to stop this slowdown. (True, at the best of times Politicians have less room to do any good in a Capitalist system though they can always harm.) Paul Krugman, the relentless critique of Bush Administration and Economics Professor at Princeton, writes in NYT that mounting Iraq war costs (no end in site) and insistency of Pres. Bush for more tax cuts is unlikely to make things any different. In other words the current American Congress and President are unlikely to do anything worthwhile to address this potential economic slow down. I say if at all, President Bush has the knack to complicate the problem further.

On this background the newly minted Treasury Secretary is on the job of vigorously selling the Bush Administration’s spin - 'it is no problem if USA economy is slow little bit, economy in rest of the world is strong and that should carry the day in the end'. His former employer (Goldman Sachs) has bit of a different opinion - Global CEO’s are worried about the impeding slow down.

So this sets the stage for an interesting phenomenon – whether the economic boom in rest of the world would allow global economy to contain the impact of USA economy slow down. All we know, this could be first time in long long time (I guess one will have to go back in the 19th century to find the parallel) that the world chugs along quite well despite a weaker Uncle Sam. Nouriel Roubini is the one who writes that aren’t going to happen. ( One should read his blog to get more details. According to him slower American Economy or recession in USA will impact rest of the global economy adversely rather than global economy cushioning out any American downturn.

My bet – American economy is likely to avoid an outright recession unless Middle East conflict and Iraq campaign do not deteriorate further (or N. Korea or Iran detonate the bomb) and Oil prices do not go above $100. Ominously with BP Oil production in Alaska going down by taking out 400,000 barrels per day from the USA market, oil price is set to go higher. If a recession does come, it is hard the outcome can be any different than what Roubini says. Hey, who in senses would go with President Bush even if he gets Goldman Sach’s CEO as the Treasury Secretary? Listen how Paulson talks now and then you realize that indeed it is something with this Administration – even a good apple goes bad when it comes under the spell of Dark Forces.

Umesh Patil
San Jose, CA 95111
August 06, 2006.

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