Although in retrospect the economic slowdown that continues across the globe to this day started sometime in 2007, the realization that we were entering a period of intense economic crisis became undeniable back in September 2008. The world stood at the brink of a collapse of credit and a spiral into severe depression. Various fiscal and monetary stimuli helped ward that off, but many of the core problems remain:
1. High debt levels in the advanced industrialized states from both government and private sector actors. US total debt is near 340% of GDP, about $50 trillion. In comparison total global government debt is just under $50 trillion. Total global debt is at $190 trillion, or about three times the global GDP. So this is a global problem, and it’s not primarily government debt that’s to blame.
2. Shifting demographics in the advanced industrialized states which will require a modification of retirement pension schemes and other reforms in order to stay solvent.
3. An imbalance between consumption and production, with the former focused on the advanced industrialized states of Europe, the US and Japan, and the latter in emerging markets such as China, Brazil, and India.
4. Environmental factors involving global warming, over population, chemical poisons and other results from over a century of unprecedented material economic growth. We don’t know how bad all this will be, but those who dismiss or minimize the danger are living in a fools’ paradise.
5. Potential problems with natural resources, particularly oil, water, and minerals needed in order to maintain economic growth. Energy shortages are the most visible (and have been experienced in small doses), but crises involving water and in the near future other valuable minerals may define the next century.
Political leaders are still trying to grapple with how to handle this transition. There are no easy solutions. Despite the election year rhetoric, no President would have fared any better than Obama on the economy – this is a global, structural crisis that defies quick policy fixes. The two favorite solutions are dubious. From the left you get the Krugman School that points to the need for a massive stimulus of trillions of dollars to retool the economy and get the country moving. On the right there is a call for less government regulation and less spending.
Less government spending will slow the economy, and in fact slows it faster than tax hikes would. Less regulation might be good in many sectors, but in some such as the financial sector it was the cause of allowing things to get so bad. The housing bubble (which helped fuel the growth of private debt) is directly attributable to lack of regulation of derivative markets and the collapse of effective financial regulation in general. Government regulations on small business may choke innovation, but lack of regulation of big corporate actors that buy government favors and transcend borders has been fatal.
Government stimulus would cause a short term spurt, but the evidence is strong that once you reach about a 100% debt to GDP ratio the increased debt does more harm than the good done by the stimulus. In Japan goverment debt soared to 200% of GDP without stimulating growth. Moreover, unless its directed in a manner that is assured to improve productive capacity and build the economy the money could end up going into consumption of foreign produced goods or risky financial speculation. In short, if not done right a stimulus would leave us no better off but with much more debt and a deeper structural crisis.
So four years in, here’s my assessment of where we are – an ambiguous assessment, I admit!
1. Gloom and doom has been overstated. This is a long term crisis, but not the collapse of western or global civilization. We have fiscal and monetary tools to avoid collapse or depression era numbers.
2. Debt levels in the private sector are down significantly (total US debt has gone from about 375% of GDP to 340%). That paying down of debt is a big deal — and is also one reason the stimulus from more government debt didn’t do more. In a best case scenario this will continue and level out and over time economic conditions will improve. However, the old “normal” of very low unemployment, easy credit and consumerism was built on sand – we won’t go back to 2006.
3. Big structural issues – especially demographics, energy, water and global warming — remain unknowns. Demographic change is less dangerous than global warming. Demographic problems can be solved through reform of pension systems and a growing economy with more reliance on technology. Ultimately too many people is more dangerous than too few. We are seeing a start of a transition from fossil fuels to alternatives, and relatively large natural gas supplies suggest this could be a stable rather than sudden transition. Global warming can make all these problems worse, however, and very little has been done on that front. That remains the gravest threat facing humanity.
4. Inflation is coming. An odd aspect of this whole crisis is the way deflationary fears have overshadowed inflation fears despite weaknesses in major global currencies. On the plus side, the ability to pay down (private) debt despite low inflation rates is a very good sign that we don’t need to inflate our way out of this crisis. However, to keep the Euro viable loose monetary policy will be embraced by the ECB to handle Spanish, Italian and Greek debt. The Federal Reserve may engage in another bout of “quantitative easing” (akin to printing money). This shouldn’t yield a currency collapse or hyper-inflation, but robust inflation rates of 5 to 10% probably will occur and create new difficulties.
5. The weatlhy are not always job creators. The growth of debt in the last ten years have yielded a growth of wealth for the investor class. This has not been earned through job creation but easy money schemes built on debt – the very thing that threatens the global economy. It was built on bubble money that yielded no productive gains; this kind of easy money at low tax rates is part of the problem, not the solution.
All told, I’m more optimistic now than I’ve been any time in the last decade about the future of the economy. I think we’re still five years away from emerging into a new kind of global economy and there are still difficulties and pain to endure. We’re four years in, and at least four years from the conclusion. But there is some light at the end of the tunnel.