US Economic MalaisePosted: February 8, 2011
I happened across the latest outlook for the global economy by Dr. Doom–Nouriel Roubini–over at Project Syndicate. We must share the same depressed muse. His outlook is very similar to mine although he’s crunching numbers in computer models that I can only dream about. It’s also a similar outlook to what Joseph Stiglitz indicated while in Davos. You will not need sunglasses while facing the future if you’re in Europe or North America. This will most likely be the decade of developing nations. I don’t have the sophisticated programs available to Roubini but his forecasts seem reasonable.
The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. These are: an anemic, below-trend, U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets; a stronger, V-shaped recovery in emerging-market countries, owing to stronger macroeconomic, financial, and policy fundamentals. That adds up to close to 4% annual growth for the global economy, with advanced economies growing at around 2% and emerging-market countries growing at about 6%.
The word anemic is never one you want to see when talking economic forecasts. Roubini does identify a few possible black swan events related to things like the deterioration of the Spanish economy that could make anemic sound like a good thing. His comments on the US economy indicate more of the same. None of the same is pleasant.
The United States represents another downside risk for global growth. In 2011, the US faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government’s lack of fiscal consolidation. Moreover, credit growth on both sides of the Atlantic will be restrained, as many financial institutions in the US and Europe maintain a risk-averse stance toward lending.
There’s some indication of our potential black swans in that paragraph. Every economist is attuned to the solvency problems in states like Illinois, New Jersey, and California. There is also no faith in the federal government’s ability to bail out any one but political donors. The only hope I have for the situation is that it’s an election year and those do tend to be important states electorally for presidential wannabes.
The other trends that worry me are the trends in oil and food prices which could mean that huge countries like China may have to readjust their plans with their sovereign wealth funds. Countries that import a lot of these items are going to be in for hefty bills. China is already experience inflation and has upped its interest rates. Roubini is watching for further signs that they recognize the potential problem. He also believes these tensions will further fuel currency tensions.
Roubini actually sees some upside risks and believes that we will slowly pull out of things. He believes that all sectors are still engaging in balance sheet repair with the exception of the US government. This is especially significant for the potential for jobs creation. If corporations are lean and mean and things do improve, this could create some much needed labor demand.
Joseph Stiglitz wrote a column for the UK Guardian after his Davos trip for the World Economic Forum. He may actually need to take the Dr Doom title from Robini. He focused on some systemic things that you might find interesting. Once again, we see an evaluation of the Efficient Market Hypothesis (EMH). This is something that should’ve happened years ago. He also mentions some skepticism of the monetarist (aka Milton Friedman) positions of central banks on inflation.
But this time, as business leaders shared their experiences, one could almost feel the clouds darkening. The spirit was captured by one speaker who suggested that we had gone from “boom and bust” to “boom and Armageddon”. The emerging consensus was that the International Monetary Fund (IMF) forecast for 2009, issued as the meeting convened, of global stagnation – the lowest growth in the post-war period – was optimistic. The only upbeat note was struck by someone who remarked that Davos consensus forecasts are almost always wrong, so perhaps this time it would prove excessively pessimistic.
Equally striking was the loss of faith in markets. In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.
The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further scepticism.
One thing that I found interesting was his description of the AWOL status of Capitalism’s True Believers and hence market failure deniers from across the pond. Stiglitz felt this gave the meetings an interesting democratic socialist feel. While the financial folks were AWOL, the labor folks attended. He’s also got some comments from them that are worth reading.
Most American financial leaders seemed too embarrassed to make an appearance. Perhaps their absence made it easier for those who did attend to vent their anger. The few labour leaders who work hard at Davos each year to advance a better understanding of the concerns of working men and women among the business community were particularly angry at the financial community’s lack of remorse. A call for the repayment of past bonuses was received with applause.
Indeed, some American financiers were especially harshly criticised for seeming to take the position that they, too, were victims. The reality is that they were the perpetrators, not the victims, and it seemed particularly galling that they were continuing to hold a gun to the heads of governments, demanding massive bailouts and threatening economic collapse otherwise. Money was flowing to those who had caused the problem, rather than to the victims.
Worse still, much of the money flowing into the banks to recapitalise them so that they could resume lending has been flowing out in the form of bonus payments and dividends. The fact that businesses around the world were not getting the credit they need compounded the grievances expressed at Davos.
This crisis raises fundamental questions about globalisation, which was supposed to help diffuse risk. Instead, it has enabled America’s failures to spread around the world, like a contagious disease. Still, the worry at Davos was that there would be a retreat from even our flawed globalisation, and that poor countries would suffer the most.
There are some important lessons being learned about ‘globalization’ right now. Stiglitz and Roubini both see the potential for all the benefits or trade and globalization to get lost in some of the flak that deservedly goes to how globalization has been carried out recently. There is nothing intrinsically wrong with a model that wants to provide jobs and goods to all countries and that should lead to a rising tide for all boats. The problem has been that we have not been great advocates for either free or fair trade. Our institutions–and that of some European countries also–seem to bring on the abuses instead. Multinational corporations with no creed other than to maximize profits have frequently overrun countries that need jobs but do not have the depth of financial, judicial, or governmental oversight to offset their might. The US subsidizes and guarantees some pretty shady practices. Our proxies–like the IMF–can force a capitalist religious zeal on countries unprepared and unable to deal with the abuse. I’d point to the Monsanto misadventures in genetic engineering as prime examples. It was appalling to learn via Wikileaks that our diplomats are international sales people for reprehensible firms like Monsanto.
The problem that I see coming out of these projection is a call for protecting the wrong people. Here are a few examples to give you an idea. Stiglitz pointed to the House of Representatives that “passed a bill requiring US steel to be used in stimulus spending, despite the G20’s call to avoid protectionism in response to the crisis”. Roubini focused on currency manipulation.
Countries with large current-account deficits need nominal and real depreciation (to sustain growth via net exports while ongoing private- and public-sector deleveraging keeps domestic demand weak), whereas surplus countries (especially emerging markets) are using currency intervention to resist nominal appreciation and sterilized intervention to combat real appreciation. This is forcing deficit countries into real exchange-rate adjustments via deflation – and thus a rising burden of public and private debt that may lead to disorderly defaults.
Protecting corporate profits is not in the interest of any one but the executives and stockholders of said corporations plus the politicians that grab their fealty fees. So, what do we make of this?
First, things are not going to get appreciably better for most of us. What we are seeing is a natural path to recovery via lack of leadership and insight into basic economics. This is a slow process and if you’re in one of those states with high unemployment and revenue issues, you’re going to lose services fast. Be prepared for higher tuition at universities, larger class size in your public schools, noticeable infrastructure degradation, and a chase to find fees for nearly everything. Your taxes may or may not rise directly, but you’ll notice the fees on everything will go to places and levels you never thought possible. Hopefully, you won’t need a new driver’s license any time son.
Be prepared to pay more at the pump and at the grocery store for real food. My guess is that your clothes and electronics will continue to be cheap, but your residual income after buy necessities will make those other cheap items off budget anyway. Your retirement funds will stabilize but you’ll have to kick up contributions to make up for the rotten returns. You still probably have lost ground even though your balance may have returned to its pre-crash level. You’ve lost the multiplying effect of positive balances and returns for a number of years so you’re still probably in the hole at some level.
I’d still recommend you lay as low as possible and not take on any big new projects. You’re unlikely to find a loan for any kind of thing. I’d still consider down sized vacations and holidays too. While corporations may have adjusted their spreadsheets and look robust, most of us will not attain that position for awhile and these forecasts don’t give me much hope for any quick improvement. I also wouldn’t expect any raises with a soft labor market. That means the increased commodity prices and fees for government services will hurt. Pocket those tax savings while you can or pay down your bills. It’s a recovery for certain, but it’s not a robust one. It’ll be anemic unless you’re planning a move to Thailand.
Oh, and buy some hip waders. Politicians are going to try to normalize this state of affairs and steal your future. It’s not about high taxes. It’s not about government overreach. It’s not about excessive regulation or lack of innovation. It’s about their inability to act on basic economic common sense while badly employing the resources they’ve been given. I don’t see that changing either.