For the last 30 years the western world has borrowed from its’ future. As the west deindustrialized and grew more service and finance oriented they stopped investing for the future and started consuming. The investing that the Western world did was in financial rent seeking assets leveraging the accumulated savings built up from the growth period between the 1940’s to the early 1970’s. In the 1980’s Wall Street took over and leverage started to multiple.
At first this leverage sprinkled over a relatively unlevered base made things multiply as if some sort of magic was happening. People were able to have the cake and eat it too. No longer did they need to save a large portion of the income for the future. All they had to do was go to the bank and borrow more money. This combined with the large demographic change brought on by the baby boomer generation entering the job market, led to an inflationary increase in the price of most financial and hard assets. At the same time there were more women entering the workforce creating two income households. The demographic shift and additional income caused a spike in consumption. This led to more employment and production.
Whenever there was a downturn in the economy, a recession, Keynesian economists opened the spigot of cheap money and the recession soon ended. Consumers saw lower interest rates and consumed even more. The Western consumer was addicted to consumption and debt; the Western governments were addicted to easy money and the supercycle of Keynesian economics. West could do no wrong. This was a time bomb ticking.
All this works until it reaches a critical point. The point where consumers cannot take on any more debt, they have almost everything they need, and demographics have shifted to save and not consume because the average consumer is approaching retirement age. This also goes for government too. The only difference is that the government has to also cut back to be able to pay for the demographic shift towards retirement and greater demand for health care. This happens at the most inopportune time when the demographic that votes the most, older people, are asking for the exact opposite. Something has to give.
Starting in 2008 the bottom fell out of the US economy, putting the world in a worldwide recession. Governments tried every Keynesian trick known to man in an effort to stave off a depression. The Western governments did not understand that Keynesian economics only works on a giant growth supercycle and not on protracted long-term declines. In the US it seems the politicians and central bank were able to kick the can down the road for a few years. In Europe they have not been so lucky. The European economy at first took to the loosing of money. Their economies were able to avoid a deep recession initially. They were able to delay their day of reckoning for almost 2 years before cracks started to appear on the edges of their foundations. Today Europe, excluding Germany, is in a deep debt induced recession. Interest rates and unemployment are spiking as consumers and governments try and make up for their past sins. People are consuming less and eliminating debt (either on their own or through forced measures like foreclosure). Governments are even trying austerity plans to rein in their spending.
The only country that seems to have escaped this downturn is Germany because they went through a similar period of extended downturn when Eastern and Western Germany unified to become one country again. Upon unification Germany experienced a long period of protracted economic growth. They spent nearly two decades cleaning up from the shock of unification. Now that they are on the other side they are the strongest country in Europe. There is a lesson to learn from this but does the West have the almost two decades it takes to master given their own demographic time bomb?
Austerity and deleveraging might work in the real long term, but is there a way where we can fixed this problem with less pain than what we are going through now? Enter China.
China has the largest population in the world. For the most part China’s GDP has been growing at over 9% per year for almost 20 years. They have repositioned themselves from a very low economic base with a communist government to now the second largest economy (assuming you do not treat the EU as one county) with a strong capitalist bent.
China has experienced its’ meteoric growth due to high savings and infrastructure spending. They went from nothing to superpower in less than three decades. Arguably China is in the stage of mal investment where large useless projects are being built. There are large examples of cities capable of having millions of residents that sit practically empty. China can no longer continue to grow as it has in the past. Its’ economic model needs to shift. No longer can they produce for the West and invest the proceeds into more production back home. The world is awash in production especially given the long-term downtrend in their largest markets in the West. They have production capacity for a world that no longer exists. If China does not change they too will experience what the West is currently going through.
Once China realizes that they need new markets to replace the saturated Western markets they will naturally look inwards. China has a long history of being inward focused. As 1/6th of the Worlds’ population starts to consume this will take up slack in production capacity in China for goods originally intended for Western consumers. Eventually this growth will lead to demand for more goods and services from the West, just as the West is exiting their long period of decline. Eventually the World will find equilibrium. Then the world will grow together, until that time, expect a long slow and painful downturn in the West.
Full Disclosure
Nothing to report.
No comments:
Post a Comment