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.