AMERICA has gone back to work. Yet the relative quiescence of the financial markets suggests that few in the know ever thought a default was likely. Or was it just that no-one could imagine economic Armageddon?
The real question now is whether or not the dollar’s status as a reserve currency will be endangered by the shenanigans in Washington? Right on cue yesterday came news that China’s economy grew at its quickest pace this year between July and September, clocking up an annualised 7.8 per cent. For the record, China’s economy has grown by circa 50 per cent since the credit crunch – Britain’s output is still down by 3 per cent on 2008.
However, despite the phantom US default, writing off the dollar as the world’s main store of value is a mite premature. The battered euro is hardly in a position to compete while the Chinese renminbi is still not fully convertible. Clearly the Chinese are headed in the direction of convertibility. According to HSBC, some 10,000 global financial institutions now conduct business in the renminbi – up from only 900 in 2011. But the monthly international renminbi trade volume remains paltry at just £1.8 billion.
Full convertibility might come sometime this decade, especially if it works well in the new Shanghai free trade zone, but China is going to have to undergo a lot of banking reform before the renminbi can be a true store of value.
Besides, a convertible renminbi means a strong renminbi, and that will crucify Chinese exports to emerging economies. The US default scare sent the renminbi to a record high this week. So don’t count your Chinese economic chickens too early.
I’m very suspicious of that 7.8 per cent GDP growth spurt. It has been driven by investment in state-owned, heavy industry – a sign of inefficiency if not desperation. To fund this investment, China’s annual budget deficit has reached a whopping 9.7 per cent of GDP, according to new IMF data. And that’s hardly sustainable.
Fracking imports put Grangemouth at risk
THE industrial dispute that has closed the Grangemouth petrochemical refinery has a subtext – the refining business in Europe is in massive decline.
The average European refining margin was around £17 per ton in the first six months of 2013. That’s down from £29 last year. Reason: demand is being squeezed by the downturn while simultaneously Europe has been flooded with cheap American refined products as a direct consequence of the US fracking boom. European imports of US diesel fuel are now at a record high.
With overcapacity rife, two million barrels per day of European refining capacity have been mothballed recently. Phillips is seeking buyers for its Whitegate refinery in Ireland, Murphy Oil is reported to be trying to sell its Milford Haven plant in the UK, while Total (Europe’s biggest refiner) has tried and failed to sell its strife-torn Lindsey refinery in Lincolnshire.
Which suggests Grangemouth is vulnerable.
Shiller Nobel deserves proportionate response
Congratulations to Bob Shiller of Yale University for winning this year’s Nobel for economics. He predicted the bursting of the dotcom bubble in 2000 and US housing crash in 2007.
He argues that the price to earnings ratio of equities will always revert to its historic mean of 16.5. Currently the P/E for the S&P 500 index is around 23.6. That’s higher than on the eve of the 1987 crash. Just a thought.