Sequester Relief and World War D

We finished last Saturday’s Weekend Markets and Money with the idea that a new arms race is brewing between the United States and China. This week it was revealed that US military spending will increase by $22 billion in 2014.

Actually, it’s ‘sequester relief‘. You might remember the fuss about the ‘sequester’ – mandated cuts to US government spending – earlier in the year. In fact, we bet you do. Why? More than anything, it was a media beat up. Plenty of people got spooked. The idea that US federal pork might be taken off the table brought out lobbyists with doomsday predictions for the US economy, the working man and anyone else you care to name.

None of the sequester cuts were over 10% as a percentage of GDP, the annual deficit, total US public debt and the Federal Reserve balance sheet. Chicken feed, in other words. None of it was designed to reduce US government spending on a net basis. It was merely designed to reduce the rate of increase, with one exception – US ‘defence’ spending.

As you can see, it doesn’t look like that idea will last. Military contractors, if history is any guide, usually feed best from the table of the State. Now they’re first in line for ‘relief’.

As for the working man, former US Assistant Secretary of the Treasury Paul Craig Roberts dissected the US November jobs data this week and estimates US unemployment is 13.2%, not the official 7%, because of the way the numbers are manipulated. Even the jobs being created are ‘mainly the same lowly-paid, part-time, nontradable domestic service jobs that I have been reporting for a decade or longer.‘Economist John Williams of ShadowStats puts the US unemployment at a whopping 23% if you include long term discouraged workers.

However, there’s an unanswered question to all of this: can the increase in US energy output bring lost, higher wage manufacturing jobs back home? Lower input costs are a huge competitive advantage.

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In the context of World War D therefore, for how long can the US economy continue to support its huge military? Australia’s stake is a big one here. Over in Scoops Lane this week, Dan Denning went into Australia’s delicate balancing act when it comes to disputes between a rising China and the US.

Dan reported:

‘Foreign affairs minister Julie Bishop made her first visit to Beijing last week and was promptly and publicly rebuked for Australia’s position on the Air Defence Identification Zone (ADIZ) in the East China Sea. At a press conference with China’s Wang Yi, Bishop was told that China is ‘deeply dissatisfied’ with Australia’s public criticism of the new ADIZ. Yi elaborated:

‘I have to point out that what Australia has said and done with regard to China’s establishment for the air defence identification zone in the East China Sea has jeopardised bilateral mutual trust and affected the growth of bilateral relations. That is not what we desire to see.’

Bishop politely hit back by saying, ‘We stand by our view.’ But when Chinese imports from Australia have just hit a record high in US dollar terms, and when they’re up 25% year-on-year you can see Australia’s dilemma. Its economic fortunes are tied to China. But it doesn’t want to dance to China’s strategic tune…the even bigger issue is who gets to make the rules about how to organise economic affairs in the Pacific in the future. China senses America’s economic and political weakness. It also senses its own economic strength.’

That strength is going to keep showing up in the Chinese currency, the yuan, if Deutsche Bank is to be believed. CNBC reported this week that the investment bank is on the record predicting the use of the yuan for trade settlement is set to grow 50% to 6 trillion yuan ($988 billion) in 2014. Deutsche Bank also expects the yuan to keep appreciating against the USD, estimating another 2% rise in 2014 after the same amount this year. This when the euro is up 5% for the year, too.

How does the currency war fit into all this? That’s one reason we’re holding World War D. Stay tuned.


Callum Newman+
for Markets and Money


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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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