It's looking very bad. The US ecomomy is a write off, President Barak Obama has almost single handily sent the US into a debt death spiral, his predecessor George Bush Jnr set it up Obama is knocking it into place. If you can think back to 2008 post inflationary pressures when oil hit 147 in July 2008 and most developed and developing countries were showing uneasy sentiments towards growing inflation, particularly China. At that time credit spreads and risk spreads namely on CDS (credit default swaps) started to widen (high costs to insure debt) as the global economic meltdown began to gather pace and by November 2008 equity markets were collapsing and credit and default spreads widened on goverment and corporate debt. The massive stimulus programs that stabilized the global ecomomy in March 2009 ensured also that credit spreads narrowed and stocks rallied and the US dollar started to decline. The concern investors, traders and everyone else has at this point in time, is the next wave of defaults are going to be from huge deficits that were created by government stimulus; at this point the US cannot get out of the inevitable debt spiral.
As Obama pledges to create more jobs through stimulus (a 2nd stimulus should be factored in prior to mid term elections Nov 2010) and pass the health care act (Medicare and Medicade) - the 2nd stimulus will essentially be the nail in the coffin for the US economy. Two aspects that are going to hinder job creation rather than encourage job creation
1. If the Obama administration overly regulates the banks, in the sense starts to effect their funding capabilities, namely trading, this will ensure that banks will make it even harder for credit to be provided to the American consumer. As bank costs and independent capital raising becomes harder, all costs will be passed onto the consumer, this means higher interest rates on loans (housing) and limited credit (small/medium size business) .
2. Health insurance will be costly for employers, therefor the hiring may be less robust when the health plan is put in place. Basically adding too and creating larger deficits will cause the US consumer/citizen to find it increasingly hard to maintain wealth, as wages decrease and inflation erodes away what is left.
Of course widening credit spreads on Goverment debt will be in vogue after Greece will eventually reveal that it will default on it's debt. This should send a shock wave through the global economy namely Europe as Portugal, Spain, Ireland and Italy will all be next. Germany will struggle to maintain the integrity of the EUR as essentially the EU ecomomy may collapse.
Asia is also concerning, although mainly creditor based nations, the one fear which I think is somewhat valid is if the US dollar rallies significantly in 2010, in which I believe it will (on risk aversion) massive short positions (namely from Asia) could unwind and hit the Asian markets like Thors hammer. Which would mean that all risk assets (that also being property related assets) that were bought with borrowed US dollars will sell like no tomorrow; Asian equity markets could essentially collapse spectacularly namely China, Korea (including it's currency WON). This is on the premise that a sharp US dollar rally is on the cards, if we see some sovereign/country defaults like Greece and Portugal come to the boil; yes the USD will rise very sharply sending the carry trading market into panic - this could dent Asia. So much so Zhu Min (China's deputy central bank chief) at Davos announced his fears on the USD carry trade.
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