• 288 days Will The ECB Continue To Hike Rates?
  • 288 days Forbes: Aramco Remains Largest Company In The Middle East
  • 290 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 690 days Could Crypto Overtake Traditional Investment?
  • 695 days Americans Still Quitting Jobs At Record Pace
  • 697 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 700 days Is The Dollar Too Strong?
  • 700 days Big Tech Disappoints Investors on Earnings Calls
  • 701 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 703 days China Is Quietly Trying To Distance Itself From Russia
  • 703 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 707 days Crypto Investors Won Big In 2021
  • 707 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 708 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 710 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 711 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 714 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 715 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 715 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 717 days Are NFTs About To Take Over Gaming?
Tesla Struggles To Compete In European Market

Tesla Struggles To Compete In European Market

Tesla continues to catch the…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

How Millennials Are Reshaping Real Estate

How Millennials Are Reshaping Real Estate

The real estate market is…

  1. Home
  2. Markets
  3. Other

Decoupling: Alive and Well

While the US economy continues to weaken (see my recent commentary: Don't Doubt the Double-Dip), many foreign economies continue to experience solid -- even spectacular -- economic growth. When the global economic crisis began in 2008, many forecasters doubted that the world economy could return to growth without the US consumer. But the world is learning what Peter Schiff has long predicted: that the US consumer is a drag on the world economy, not an engine for growth. As "decoupling" becomes more apparent, emerging economies are forming trade links among themselves, accelerating the process of decline for the United States.

To get a better understanding of how decoupling works, it helps to picture a train in motion. Together, the cars and engine travel together on the track. Now imagine that last car, the caboose, detaches from the rest of the train. At first, the caboose travels at nearly the same speed as the rest of the train. The distance between the two is hardly discernable. Over time, however, the car slows down as friction and gravity take their toll. Meanwhile, the engine powers ahead. The distance between the caboose and the train gradually becomes greater and greater, until finally the engine is gone from sight, leaving the caboose sitting idle on the track.

This process describes how many of the world's economies are steadily pulling away from the United States. As trade links grow between countries far from our shores (such as those being solidified between Asia and South America), the distance between the United States and the rest of the world is becoming larger, and decoupling is becoming more and more pronounced.

While the US economy sputtered to a 1.6% growth rate in the 2nd quarter (Q2), many Asian countries rapidly pulled away, powered by trade with each other and the rest of the world. In Q2, China's economy grew a startling 10.3%. Americans would be thrilled with growth half that rate. Asia's second rising star, India, expanded by a solid 8.8%. The Four Tigers also posted excellent numbers: Hong Kong grew at a 6.5% clip, South Korea at a faster 7.1%, and Taiwan at 12.53% -- while Singapore clocked an astonishing 18.8% growth rate! If that's not decoupling, I don't know what is.

These numbers are not likely to be a short-term phenomenon. Instead, I feel they represent a dramatic realignment in the pattern of global economic activity. Economies that have long enjoyed a trade surplus are now less likely to loan money to broke and bloated deficit economies such as the United States. They are now more inclined to consume their own production or trade with other exporting nations. Indeed, China is now the largest trading partner for several of the world's major economies, including Japan, South Korea, India, Hong Kong, Taiwan, Australia, Russia, and Brazil. Slowed by the gravity of excess debt and the friction of increasing taxes and regulation, the American caboose is straining to keep up.

But the trend is not limited to Asia. All around the world, countries with sound economic policies are continuing to expand. In fact, despite the attention paid to the so-called PIIGS, several European economies are also showing signs of decoupling. Germany, Europe's economic powerhouse, grew at 2.2% in Q2 - its fastest rate in over 20 years! Switzerland expanded by 3.4% in the 2nd quarter, while Sweden and Finland grew by 4.6% and 3.7% respectively. Even historically tumultuous Poland boasted a 3.5% growth rate. Predictably, this growth has whetted Europe's appetite for imports, causing the EU to recently surpass the US as China's largest export market.

The trend also extends to producers of the single most important commodity in the world: oil. According to the Department of Energy, the US imports over 60% of its oil consumption; however, new production is increasingly being diverted to international markets, leaving our country vulnerable to 1970s-style shortages.

In the 1st quarter of this year, Saudi Arabia exported more oil to China than it did to the US. With a new growth market for its petroleum, Saudi Arabia is estimated to grow 3.9% this year. Russia grew at a rate of 5.2% in Q2, largely for the same reason. China is now believed to be Iran's largest trading partner, according to some sources. And although the United States remains Venezuela's largest trading partner, China's nearly insatiable demand for oil has catapulted it into 2nd place for trade with this oil-exporting nation.

Whether you are looking at ASEAN, OPEC, or the EU, it is clear that decoupling is the order of the day. The world economy is rebuilding itself with China as its engine and hub. This is the essence of decoupling, and until recently, it was thought by many respected figures to be impossible.

In the old days, it was said that when the United States sneezed, the rest of the world caught a cold. This time, they might just excuse themselves and move to the next car.

 


For in-depth analysis of this and other investment topics, subscribe to Euro Pacific's Global Investor Newsletter. Click here for your free subscription.

Click here to download Euro Pacific's Special Report: My Five Favorite Gold & Silver Mining Stocks.

Be sure to pick up a copy of Peter Schiff's just-released economic fable, How an Economy Grows and Why It Crashes.

 

Back to homepage

Leave a comment

Leave a comment