Bursting of the US debt bubble and effect on petchems

China, Company Strategy, Economics, Environment, Europe, European economy, European petrochemicals, Sustainability, US

By John Richardson

THE US economy is in a debt-induced bubble that will sooner or later burst with of course major negative consequences for the rest of the world.

You cannot print babies. The huge amounts of money that the US Federal Reserve has pumped into the US economy since 2008 combined with last year’s tax cuts cannot reverse the fact that spending on housing, transportation and other goods and services declines when people retire – and the US population is ageing.

All that the stimulus money has done has brought forward demand from later years. People have been encouraged to spend now rather than later from a diminishing pool of total demand as the US population ages.

The above chart from the New York Times illustrates the core of the problem. As demand declines US interest costs are set to soar.  They will rise from 6.6% of total federal government expenditure in 2017  to 13% in 2028. And as you can see from the trend-line the steep take-off in interest costs has already begun.

US debt default a major risk

What is truly shocking is the warning from the Congressional Budget office that the US will face decisions on whether to default on the Highway Trust Fund (2020), the Social Security Disability Insurance Trust Fund (2025), Medicare Hospital Insurance Trust Fund (2026) and then Social Security itself (2031).

If the US decides to bail these government services out it will either have to make cuts elsewhere, or raise taxes, or default on the debt itself. As you can see in the case of the Highway Trust Fund this is not a threat which is many years away. This is instead a threat for 2020.

Adding to the immediacy of the danger is rising US interest rates as the Fed withdraws stimulus. This is obviously one of the reasons why the trend-line on the on the New York Times chart is already taking off.

Paul Hodges and I have been warning of these risks since 2011 when we published our e-book, Boom Gloom & The New Normal. The book and subsequent research on the same themes have been the subject of many of our presentations at petrochemicals industry conferences and to individual petrochemicals companies.

A major new Deutsche Bank study, which was published last month, supports our arguments.

Impact on petrochemicals

The smart petchems companies will already be positioned to cope with the bursting of the US debt bubble.

They will have hedging strategies in place to deal with the subsequent volatility in oil prices and of course the downstream volatility in petrochemicals prices and demand. A risk is that as investors in stock and commodity markets flee to safety, equity and commodity markets, including oil, will see major sell-offs.

Longer term, the strategies that the smart companies will already have firmly in place will take into account more regional and less global markets. When the US debt bubble bursts, populist politics will become even more popular as voters will feel even more betrayed mainstream politicians. Trade barriers will thus rise from today’s already elevated levels.

Another  demographics-related challenge that the smart companies will already be ready to deal with is sustainability. In the Babyboomer peak years anything seemed possible and so consumption exploded. As populations age in the West, spending habits will become more cautious and risk-averse. And from the 1970s through to the early 2000s, during the Babyboomer-led economic supercycle,  we were less aware of the impact of our consumption behaviour on the environment.

PREVIOUS POST

Sustainability to stop petchems from dominating oil growth.....

05/10/2018

….and oil consumption into petchems might even decline because of the plas...

Learn more
NEXT POST

China polymer growth at risk of 8.6m tonne decline on trade war

10/10/2018

By John Richardson THERE is no other country or even region in the world that co...

Learn more
More posts
BASF’s shocking Q2 results should have been no shock at all
09/07/2019

y John Richardson NOBODY should be surprised by the BASF results for Q1 2019 where, on a year-on-yea...

Read
Multiple trade disputes and the risks for the US PE industry
03/07/2019

By John Richardson FALLING out with a trading partner as big as China is problematic enough. But the...

Read
China PE overstocking at nearly a million tonnes as demand weakens, competition intensifies
02/07/2019

By John Richardson MEASURING petrochemicals and polymer inventory levels in China with any reasonabl...

Read
China petrochemicals recovery on G20 trade war progress will be shortlived
30/06/2019

By John Richardson China petrochemical and polymer price spreads over naphtha feedstock costs will r...

Read
President Trump’s Vietnam warning threatens more polyethylene disruptions
27/06/2019

Just to stress  that, as always, what follows are my own personal views and not those of ICIS By Jo...

Read
US LLDPE imports and the impact on European petrochemicals
26/06/2019

  By John Richardson EUROPEAN linear-low density polyethylene (LLDPE) markets have yet to feel ...

Read
Southeast Asia PE spreads further underline weak demand, but trade talks promise rebound
25/06/2019

By John Richardson THE GOOD news today is that the US and China have agreed to resume trade talks. P...

Read
Global polyethylene: Supply is not the problem, it is demand
24/06/2019

By John Richardson WHEN people talk about supply it is very often because it is much easier to quant...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more