Will disinflation hold in 2015?
The big question to be answered is the negative or positive impact on this development.
While the global economy continues to wallow in the shock waves engendered by a 40% drop in crude oil prices, both in the United States and abroad, the big question to be answered is the negative or positive impact on this development.
From the standpoint of previous prognostications, there will be winners and losers in 2015. But the net effect for the United States especially will be a benefit for automotive, air travel and will be proving a general benefit for the consumer sector.
What had been expected as America’s greatest year ever in overall energy development will be mitigated by the following factors:
1. Fracking in shale fields such as Eagle, Ford, Bakken, Permian and Marcellus will continue as a combination of improving technology, a $50-per-barrel break-even point and continued domestic refining demand will continue to keep these proven development shales on the positive production side. However, the most recent startups, instigated with borrowed investments loans, could be in trouble.
2. With prices, at best, returning to $80 per barrel by the end of the first quarter, it’s doubtful that U.S. production will climb much over 9 million barrels a day, one million short of what was anticipated.
3. The expansive private national piping infrastructure, spearheaded by Ed Kinder, CEO of Kinder-Morgan, may run into increased Environmental Protection Agency resistance, while the Trans-Canada XL oil pipeline may not see the light of day, due to the high-cost of Canadian oil sands. The U.S. southern refineries, where they were originally headed, may be able now to get much cheaper Saudi crude, or American shale, priced in the $60 range.
4. Deep-sea drilling in the Gulf of Mexico, by both the United States and Mexico, as well as Petrobas in Brazil, may become too costly due to the high cost of extraction.
5. Oil service equipment, such as drilling rigs and their supplemental aspects, will likely be in over supply, while a global offshore activity, such as Brazil’s Petrobas and others, could be out-priced by the onshore production sectors.
The world’s consumers and U.S. residential construction workers will come out as clear winners, as well as the general public facing more accommodative Fannie Mae and Freddie Mac, offering a greatly reduced 3% downpayment requirement. This could spur a new single-resident housing boom, which we hope will not prove to be as disastrous as the uncontrolled 2007-2010 Great Recession predecessor and implementer.
Japan, Germany economies recede
While much criticism is rightfully leveled at America’s continuous lack of full-time employment and its gross domestic product growth at a historically mediocre 2.5% rate, the U.S. economy is assured of a solid, ongoing expansion as the current decade keeps unfolding.
Conversely, both Japan and Germany, who rose to the top rung of global economic leadership in the latter part of the 20th century after rebuilding their war-shattered infrastructures, are just hanging on at the edge of recession as 2015 beckons.
The growing gap between America’s increasingly brightening future and the lack of sustainable growth by both Germany and Japan is based on the following factors:
• Both Japan and Germany are facing decreasing populations and higher production costs as they attempt to embrace the questionable call for climatological purity by discarding commercial nuclear power and embracing various costly renewables to take its place. The combination of these two factors alone makes it increasingly difficult to maintain their global status in the top tier of world expansion.
• Although lauded for their leadership in automotive, communications equipment, scientific instruments, etc., an increasing number of these world-celebrated names are finding their production plants gravitating to foreign soils, much of it to the United States. This lowers their domestic productivity and makes their widening social benefit programs harder to cover financially.
• While the U.S. is solidified by a steadily increasing population, with most of it comprised by legal immigration of 1.5 million annually and the highest reproduction rate in the Western world, both Germany and Japan are now on the downside of sustaining their current populations (81 million and 125 million, respectively). Although high in the world’s ranks of technological and scientific innovation, their lack of internal growth has not translated into accelerating productivity and decreasing unit costs that such an upward thrust would normally bring.
That is why the United States is in a class all by itself, with most of available global monetary liquidity thrusting its path to it. While America’s internal political confrontations tend to place obstacles in the path of maximum growth that it could be enjoying, the United States is the world’s only nation ever to rank at or near the top in natural resources (fossil fuels and renewables), technological development, productivity, population growth and exports.
• The United States is the only nation in the world which harbors the bulk of its internal growth in consumer demand (68% of gross domestic product) and the proliferation of hundreds of thousands of independent businesses in all aspects of the economic spectrum.
It’s safe to say that no matter what the immediate future brings to the world’s increasingly dangerous geopolitical changes, the United States is the runaway favorite among all other nations to bet on in the arena of future economic success.
As the U.S. Treasury debt has risen to an all-time record high of $18 trillion, a 70% increase since President Barack Obama took office in January 2009, the media hype is muted. This is in comparison to the previous trillion dollar milestones that have occurred during the Obama presidency.
A major reason for this less dramatic reaction to the mounting debt has been the lessened effect on the U.S. economy as a whole and its comparison to other global economic titans, who lag the United States in their total economic viability. The reasons for the lassitude that has accompanied the $18 trillion debt mark are as follows:
1. During the 2008-2014 timeframe, the overall potential value of the United States as a global asset has almost doubled. While overall household assets of a 320 million population, together with all supporting appurtenances, have returned to the pre-recession value of close to $90 trillion, the potential value of natural resources (oil, natural gas, coal and their derivatives) have potentially doubled America’s value. This doesn’t make the debt insignificant, but it is founded on a much higher potential gross domestic product value.
2. With the economic world, as a whole, caught in the web of a global disinflationary environment, America’s huge debt is much less of a burden than previously anticipated. Despite its inflated size, there is more international participation in the several weekly auctions, which the U.S. Treasury holds to fund its debt. Along the yield curve, extending from six months to 30 years, the critical 10-year note has been trading at the lowest percentage yield in years, with a face value exceeded only recently by Germany.
3. International discretionary expenditures and investment funds derived from a historical record high of multitrillions of monetary liquidity have focused on the United States as their No. 1 investment choice. Although much of these funds go into the commercial U.S. stock and bond markets, an increasingly sizable amount participates in the treasury debt auctions. China is the major foreign debt holder at 7% in U.S. debt paper.
This also relieves the amount of interest payments for which America is responsible, since much of the debt is held at interest rate levels well below the average of previous periods dating back to the mid-20th century.
4. Although the budget deficits of the past two fiscal years (Oct. 1-Sept. 30) have generated deficits well under the four-in-a-row trillion-dollar budget shortfalls of the Obama administration’s first four years, the House/Senate/White House sequestration agreement of two years ago has mostly been extracted from the Defense Department sector.