The World Economy: Goodbye Golden Age, Hello Tough and Turbulent Times

Many people are waiting for a promised economic recovery that will never come. They remind me of Samuel Beckett’s famous play Waiting for Godot, where unfortunately Godot never arrives and there is never any explanation provided for why he fails to show up. Theatre audiences around the world have been eagerly expecting Godot for half a century, but regrettably Godot will never arrive.

So it is with fabled “Economic Recovery” so long promised by government leaders around the world. It will never come, at least not in the form expected, or within any reasonable time-line. I will try to provide you a coherent explanation for this, since I lack Beckett’s literary impulse to keep you in suspense.

My thesis is that the year 2000 marked not only the end of a century, but also the end of the Golden Age that started soon after World War Two. Before that, there had been a Catastrophic Era which spanned two world wars and a grim depression.

For the past decade, we have come back to more normal historical patterns. However, this new era seems tough and turbulent compared to the recent Golden Age.

I was born in 1946, shortly after World War Two. I did not realize that my birth timing was nearly perfect. For although we faced significant challenges in the second half of the 20th Century, in retrospect this was unmistakably the most prosperous time period recorded in human history:

• World trade increased more than 10 fold

• Technology and productivity exploded beyond our wildest imagination

• The worldwide standard of living improved immensely: to a level our grandparents could never have imagined

During most of my career, optimism was rewarded. If you bought a house, it could go up as much as 5 - 10 times in value. If you bought and held stock investments, they would equally turn to gold. If you got a good education and worked hard, success seemed highly likely. We all seemed brilliant.

But no more. These golden, easy times have shifted to a far more challenging outlook. Finding or keeping jobs is now difficult in most places around the world. Investments go up and down precipitously without any clear trend.

As best I can calculate, this sea change in the global economy occurred about the year 2000. It wasn’t the Y2K phenomena so many had feared. However in March 2000, the technology bubble burst with a disastrous crash of NASDAQ stocks that has never been reversed. A year and a half later was 9/11, the beginning of the war on terror. This lead to the war in Iraq and later to the war in Afghanistan.

By any reasonable measure, the last 10 years has been a flat decade. Personal income adjusted for tax and inflation has not grown in most countries. Stock markets in the industrialized world are mostly still in the same trading range as they were a decade ago, which is the first decade without substantial gains during my lifetime.

While emerging economies in China, India, and Brazil are faring somewhat better, they do not alter the global picture of stagnation for the past decade, nor can they provide sufficient impetus for worldwide growth ahead.

My view is by no means unique. I read recently that the legendary bond guru Bill Gross believes that investors should face up to a “new normal,” a world of feeble economic growth where returns on stocks and bonds are stubbornly low.

There are also some dire forecasts of imminent global catastrophe, whether due to financial crisis, military conflict, or environmental disaster. While such predictions can never be disproved until retrospectively, I do not share these dark fears. Rather, I see the world bumbling forward along the current general path for an extended period.

So where does this leave us? Life on easy street is gone. There are still many opportunities left however: for careers, for investments, for companies and for governments.

But those opportunities require a new calculus. Budgets and plans based on an approaching global recovery are doomed to failure.

Governments will need to reduce their spending, especially in the United States and in other formerly prosperous nations. Companies will need to avoid debt and speculative endeavours. Individuals will need to return to the frugal habits of their grandparents.

Human history has recorded previous periods of huge growth and also times of widespread war and economic catastrophe. Nevertheless, the times in between have seemed tough and turbulent to the people experiencing them.

Our ancestors adapted to new environments, whether willingly or reluctantly. We face the same necessity. If we embrace this new era optimistically, we will thrive.

World Economy: Stuck in Low Gear?

In March while driving on the south coast of Italy, I encountered some of the most demanding road conditions I have ever seen.  I have previously driven in the Swiss Alps and on other tricky mountain roads, but none compare to the danger and thrill of driving on the Amalfi Coast, particularly when you throw in the impatient local drivers.  One driver passed me on a single lane road and within five minutes he caused a head-on collision. But with the luck of the Italians, his damage was moderate and no one plunged off the steep cliff. 

My little Mercedes rental car had seven gears, so I was able to drive in a low gear. This prevented my car from running away when traveling around blind corners and while going up and down the steep inclines with inadequate guard rails. (Please see my photos in my previous post.)

But low gear is not always fun. It became quite obvious in traveling through southern Europe, that the economy there is also stuck in low gear.  The volume of tourists is considerably reduced from a few years ago.  Shopkeepers are struggling to get enough business.  Everyone complained of jobs lost due to Chinese imported goods.

Regrettably, the situation in Europe economically is not much different from the rest of the world.  We are all stuck in a low gear.  And trying to drive our economy faster is frustrating governments everywhere.

Because of the large swings in world stock markets, the underlying economy seems hard to track. During good months for the stock market, people get their hopes up for a full recovery. When markets plunge, as they did in May, fears revive about a second recession.

The best indicator to watch worldwide is the growth of jobs in the private sector. In the USA, jobs appear to have improved recently, but that is due mainly to temporary government workers hired for doing the next census. When these temporary workers are released in a few months, the situation will reverse.

Unfortunately, not nearly enough jobs are being created for a recovery. Some economists call this a jobless recovery. But without job creation, the term “recovery” is meaningless.

The situation is marginally better in the developing world of China, India, and Brazil.  But not good enough to revive the whole world economy. Those who think a recovery in China can restart the global economy are dreaming. The transfer of too many manufacturing jobs to China is one of the global imbalances that must be rectified.

So what is the outlook?  Another big financial collapse? A recovery next year? I suspect that next year we will still be stuck in low gear. There is a danger of going back into reverse like what happened two years ago, but I don’t expect that.

Another possibility is more stimulus to try to get the economy moving faster, which President Obama wants. But he is nearly alone in believing that deficit spending would help. I support the majority of world leaders who believe that deficits must be cut to avoid a bigger collapse in a few years.

So why can’t someone fix the economy?  Why can’t we create lots of new jobs?  The answers to these questions are complex.

The time period most of us remember best is the last 50 years, when the economy grew at unusual speed up until 2008. That was due to broad improvements in technology, relative global peace, and constantly growing world trade. Those conditions will not be repeated soon.

The best thing is for individuals, families, companies and governments to realize that we will likely be stuck in low gear for the foreseeable future, likely for another 5 – 10 years. We are far better off than people were in previous centuries, but we shouldn’t expect more from the economy—rather we need learn how to make do with less.

Individuals will still be able to find careers. Some companies will grow and succeed. However, for most people and for their governments, this will be a very challenging time.

American and World Financial Crisis Continues

During the past three years years of writing this blog, I have been a prophet of doom about the American (and World) financial situation. (See my post "A Hard Rain's A-Gonna Fall" in March 2007 and many subsequent posts). I keep hoping that my observations are based on poor digestion and I will be proven wrong by a huge economic recovery; alas, that is not happening.

Although stock markets and commodity prices have recovered considerably from their lows in 2008 and 2009, the fundamental ills of the economy have not been solved. Personal income and employment have not recovered at all. Trade deficits remain immense. Unprecedented government spending has lessened the feeling of impending doom, but I wonder how much has actually been improved by the trillions spent.

See this week's article by Niall Ferguson A Greek Crisis is Coming to America. My wife and I will traveling to Greece and several other Mediterranean countries in March. Already there are widespread strikes due to severe government spending cutbacks. I knew this situation when I planned our trip. However, to avoid all economic crisis zones, we would need to stay at home.

I wish I had some brilliant insights to offer of how to avoid this continuing storm. On a mass scale, the die is already cast. Governments will reap the consequences of deficit spending in the near future.

For individuals, we can protect ourselves to some extent by embracing the values of our ancestors who nearly always lived in precarious times. We need to spend less than we earn and to become even more frugal. We need to focus on our jobs, however humble, and scramble to earn enough to live. We need to look after our neighbors and the least fortunate people in our communities. We must abandon hope that governments can rescue us; they seem unable to even look after themselves.

I don't think this crisis will last indefinitely, but it will stay longer than most of us have patience to endure. My hope is that we will relearn what our grandparents knew.

For Christmas I gave my wife the book From Dawn to Decadence by Jacques Barzun. His title could well be the epitaph of our Western Civilization, unless we reinvigorate our approach to life, money and work.

However, at heart I remain a stubborn optimist. I believe humanity has the metal to survive even worse storms as we demonstrated during the great wars in the first half of the 20th Century. We will need to change our ways.

American Deficits Questioned By Lenders

All is not well for the American financial house. Although retail sales are rising, corporate profits rebounding, and the stock market enjoying a more than 30% recovery, there are other statistics which give cause for serious concern. For instance, the US Dollar has fallen 15 - 20% against the Yen, Euro and the Canadian Dollar although their central banks tried to stop the alarming fall of the Dollar.

More clear evidence of this is the dramatic 50% rise in gold during the past year, which overshadows the 30% rise of the S & P 500. Governments and banks around the world have lost their faith in the American Dollar. What is more, it is becoming increasingly difficult for America to finance its multi-trillion deficits. Although the budget deficit is merely a trillion dollars, the amounts poured into the financial system by the Federal Reserve to bail out big banks, investment firms and other corporations is closer to $10 Trillion. The amount is so immense that the global system may be unwilling to finance the American Government for borrowing. China is the largest lender, but it speaks for most other creditors. See the following N Y Times article on November 14.

China’s Role as Lender Alters Obama’s Visit
By HELENE COOPER, MICHAEL WINES and DAVID E. SANGER

"When President Obama visits China for the first time on Sunday, he will, in many ways, be assuming the role of profligate spender coming to pay his respects to his banker.

"That stark fact — China is the largest foreign lender to the United States — has changed the core of the relationship between the United States and the only country with a reasonable chance of challenging its status as the world’s sole superpower.

"The result: unlike his immediate predecessors, who publicly pushed and prodded China to follow the Western model and become more open politically and economically, Mr. Obama will be spending less time exhorting Beijing and more time reassuring it.

"In a July meeting, Chinese officials asked their American counterparts detailed questions about the health care legislation making its way through Congress. The president’s budget director, Peter R. Orszag, answered most of their questions. But the Chinese were not particularly interested in the public option or universal care for all Americans.

“They wanted to know, in painstaking detail, how the health care plan would affect the deficit,” one participant in the conversation recalled. Chinese officials expect that they will help finance whatever Congress and the White House settle on, mostly through buying Treasury debt, and like any banker, they wanted evidence that the United States had a plan to pay them back."

I have great sympathy for the American Government in its attempts to deal with the financial crisis, which had looked like a looming depression. Unfortunately however, there are very real limits in trying to buy a recovery through fiscal and monetary stimulus. I have mentioned this theme in several past blogs.

I hope America doesn't turn this financial challenge into a political drama of hurling blame at opponents. Everyone has helped to create this problem: government, banks, corporations and individuals, both rich and poor. Everyone needs to work together to rebuild the American economy. I believe the Obama administration is finally realizing the magnitude of the problem. They should be given support, at least until the 2012 election.

I wonder if a moderate depression would have been any worse than the likely prospect of stagflation (no growth, but with inflation) for a number of years ahead.

 
 
 
 

The Misuse of Government Economic Statistics

I have long argued that official statistics distort our true economic situation and cannot be relied upon to see where we are headed. This Harper's article by Kevin P. Phillips supports my viewpoint eloquently. Here are a few excerpts:

"..since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economy are measured. The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed.

"..the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

"The corruption has tainted the very measures that most shape public perception of the economy—the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity."

World Economy? Tough, but Normal: Reducing Expectations following the Artificial Wealth boom.

The economy is emerging from a severe downturn that may have been a small depression in much of the world. By “depression” I mean the 10% or greater decline in the real economy, not the governments’ distorted estimates of GDP decline.

In the past 18 months, world stock markets declined by 40% to 50%. Retail sales fell by more than 10% in the worst months compared to the prior year. World trade was down considerably more than 10%. Unemployment has soared and jobs are hard to find.

However the G20 nations, led by America and the UK, are conducting the most dramatic economic rescue operation ever seen. They are spending staggering sums to re-inflate sagging consumer demand. Stock markets are recovering some of their giant losses. Oil and other commodity prices, which fell considerably during the financial crisis, are now climbing back quickly.

We are left with two questions. Is this dramatic effort worth the trillions of dollars borrowed by governments? Will this bold rescue hold up for long?

I give world governments’ full credit for this rescue effort, since a big depression would be catastrophic. However, government debt is increasing by colossal proportions. This will inevitably lead to higher taxes and inflation.

We may already be starting a new inflationary trend (seen in commodity and stock prices) that will be hard to contain. That is why the price of gold has risen 30% and may rise further. Gold is a barometer of inflation.

Listening to some news reports and internet discussions, it would be easy to conclude that we live in abnormally difficult times. However the economy is actually close to normal, and decidedly better than the historic economy experienced by our parents and grandparents.

It is folly to think that the height of an economic boom is a long term norm that can be permanently maintained by government policies. Government should not try to interfere with the normal up and down cycles of the economy. In fact the Federal Reserve’s overreaching ambition to achieve such an optimal economy is what led to our recent financial collapse.

I am 62 years old and my parents were born before 1910. From my memories and from theirs, I realize how much better off we are now than people who lived fifty or a hundred years ago. Back then, most people in America, Europe and worldwide lived in wretched poverty by today’s standards.

The media gets transfixed by whether the economy grew or declined this year. We get agitated when our house value or retirement funds go up or down 20%. But really, our economy is quite good enough for any person willing to work hard and to save money. The economic world is challenging, as it always has been, but not exceptionally so.

A serious student of history would acknowledge that we live in one of the most fortunate times in human history. For one thing, our military conflicts are minor compared to the world wars that occurred during the past 100 years. Rarely in history have we been able to travel around the world so easily and safely. Our current “wars” rate no more than a 1 or 2 on the Richter scale of historical conflicts.

Despite continuing challenges for the American government and American financial system, the rest of the world’s economy is gradually getting back close to normal. The real challenge is getting past the unrealistic expectations produced by the artificial economic boom we enjoyed so much five years ago.

After the historic 9/11 events involving the destruction of the World Trade Towers in New York, the American Federal Reserve Bank over-reacted. They brought interest rates down far too low to counter fears of a major recession. Other central banks followed suit. As a result of the lowest interest rates ever, there was global boom in real estate and stock markets that created artificial wealth* for most investors and home owners. This financial euphoria led predictably to a grim correction in 2008.

This crisis was most acute for American banks, investment firms and real estate. For a while the world was terrified by the American crisis, but eventually they realized that the rest of the world was not as seriously affected. Once the liquidity crisis was past, Asian economies resumed their growth and Europe is also recovering.

America is left with both bigger challenges and greater resources than most nations. Unfortunately, the American mood seems sour. Everyone, rich or poor, feels especially deprived and unfairly treated. People are unwilling to accept that you can no longer enjoy high wages while living on inexpensive goods produced by cheap labour.

This is a time for discipline, for hard work and for financial prudence, and helping your community. Those who work hard and save 10% or more of their earnings can look forward to a reasonable future. Those who wait for a better economy or government job creation to rescue them will be frustrated.

The Obama government is disappointing nearly everyone – which is actually a sign of good government. Difficult choices need to be made that require sacrifices by all. The American financial system needs to be reformed. The American medical system is poor compared to other leading nations; hopefully a few steps can be taken towards universal coverage and to bring down the costs. But no one will be satisfied soon – health care will take years if not decades to fix completely.

So, turn off the news reports. Go outside for a walk. Call someone you love. Fix a good meal. This is a time for renewed hope. This is a time to build a good future for yourself and for those you love. The economy won’t get much better than this.

** For more insight on the artificial wealth created earlier this decade, please read this article.