The American Interest
Analysis by Walter Russell Mead & Staff
The World Economy: Back on the Brink?

Via Meadia isn’t an economic forecasting site; if I knew what the world economy was going to be doing tomorrow I would be too busy making zillions by trading exotic financial instruments the rest of you bozos know nothing about to share my secret insights with the rest of you. (Indeed, one useful thing to remember about all economic talking heads and pundits: these are people who think they can make more money by giving their opinions rather than acting on them. If you knew what markets were going to do, you would have no incentive to share that knowledge.)

But for what it’s worth, the world economy is beginning to look a little shaky again. The two problems: Europe has papered over its euro difficulties but hasn’t solved anything, and China is reaching the limits of its old development model without having found a way to shift to something new.

In past decades, the relative health of the US economy might have provided enough of a global stimulus to overcome these problems, but the train is too long and the hill is too steep for the old locomotive to pull the world economy to the top of the mountain on its own. In Pharaoh’s dream, the seven lean cows devoured the seven fat ones and that is our fear today: that the parts of the world economy will bring down the successful ones.

The danger is greater because the US is in the middle of its transformation from a blue model, industrial economy to something postindustrial that we don’t yet understand. The interaction of Asian, European, Latin American and Anglosphere economies also confounds policy makers. We’ve never had anything quite like the global economy in view today, with its mix of huge surplus and titanic deficit economies, with its fiat money and globally integrated financial markets. The experts and pundits stroke their chins very convincingly on TV, but neither they nor anybody else really grasps either the big picture or all the moving parts that make up the world economy today.

The immediate problem is that Europe’s latest dose of pain meds is beginning to wear off. Investors are looking at the Portuguese, Spanish and Italian economies and they don’t like what they see. Nor should they. Bond yields are rising sharply across Europe as people think more clearly about just how unlikely it is that the current mix of fiscal austerity and financial market life support can generate the kind of growth Europe needs.

News that China’s GDP growth has slowed more dramatically than expected also has investors worried. The political turmoil over the Bo Xilai scandal isn’t helping; China’s model requires a strong, technocratic economic management team that is able to act decisively. China’s leaders look more embattled than usual, and its not clear if the government will be able to stick to its economic playbook as it seeks to keep the population sweet.

How all this plays out in the world’s volatile stock markets is not something Via Meadia can predict, unfortunately. And the long term outlook in our view remains bright.

There is a vital truth about the economy that doomsayers often forget: People want to make money, are constantly looking for ways to make money, and are creative and adaptive. More people than ever before live in countries where they are allowed to try to improve their situation in life, and where governments are more focused on creating conditions favorable to growth. We have more scientific and technical knowledge than ever before, and the information revolution in particular is creating new industries and new opportunities with breathtaking speed.

Given all that, optimism about the medium to long term seems like the right approach. But with the potential for rapid, transformative growth also comes the danger of growth pains. Between the Civil War and 1910 the US became the world’s largest and most advanced economy and huge new cities and industries sprang up across the country. That was also a time of painful depressions, sudden economic crises that ruined investors and bankrupted companies, and of social conflict and economic inequality.

Good news for the big picture does not translate automatically into smooth and predictable economic progress in the short term. In fact, the better the big picture looks, and the more powerful are the forces pushing the world economy toward major growth and change, the more market turmoil we are likely to experience — and the harder it is for policy makers to know what to do.

Growth hurts. Change brings risk. Welcome to our brave new world.

 

Published on April 14, 2012 9:46 am
  • http://facingzionwards.blogspot.com/ Luke Lea

    “the US is in the middle of its transformation from a blue model”

    More like the beginning of the beginning.

  • http://facingzionwards.blogspot.com/ Luke Lea

    “optimism about the medium to long term seems like the right approach”

    Too bad we have to live in the now. I tell my college-age daughter, “Don’t worry, darling, things will be better for your grandchildren.”

  • http://facingzionwards.blogspot.com/ Luke Lea

    “Between the Civil War and 1910 the US became the world’s largest and most advanced economy. . .”

    http://tinyurl.com/c2yom2r

  • http://thepencilofnature.net Lorenz Gude

    Yes, and in such times both known and unknown unknowns proliferate. You can’t do much about the latter, but you can think through the implications of the known unknowns – like a nuclear war in the middle east or a complete change in the energy economy caused by a fusion breakthrough. Check out Bussard fusion – it could change everything.

  • Anthony

    “The two problems: Europe has papered over its euro difficulties but has’nt solved anything, and China is reaching the limits of its old development model without having found a way to shift to something new…The interaction of Asian, European, Latin American and Anglosphere economies also confound policy makers.”

    WRM, different kind of challenge to the economic and social system but structurally nothing new since 1877 (when greatest march of economic growth in human history was organized); now the organizing “principals” are more globally stratified – thus many more imponderables (our brave new world).

  • john h

    WRM has been beating the tom-tom of the blue social model for a while now and I’ve watched with interest as he’s developed the idea in new ways. In this latest iteration, he points out that the model has implications not only for the U.S. at home but also for the world economy.

    While it’s good to remain optimistic (and we should) it’s also important that we face the future realistically. One clear by-product of the blue model has been that it has accelerated the rate at which manufacturing has fled to other parts of the world. At a time when the U.S. should have been leading the way in robotics, we instead turn our full attention to outsourcing models. Hyper-regulation, bloated pensions and escalating taxes have driven businesses away.

    Against this backdrop, one can only imagine what global conflict would look like when the bulk of our manufacturing is done overseas. It seems that in our quest for a government that expands and provides ever new services, we’ve lost sight of essential governmental services, like national security. The blue model has put us over the proverbial barrel.

    While we’re well prepared for minor conflict, can you imagine a major crises? (China – could you please send us more basic computing components and steel, we seem to be losing the war with you?)

  • http://connecticutcomments.blogspot.com Jeff

    Analysis of the world economy has to include the attempt by many to bring down the entire structure. One hundred years ago, the idea that a person or even an organized group could disrupt the entire world economy to the point that it caused serious harm was an impossibility. Even as of World War II, no one, not even a well armed country could truly bring down the world economy. That, however, has changed. The avenues of commerce have become more and more centralized with the result that choke points have appeared that make the world economy more and more vulnerable. I am not talking about nuclear war here. Think instead of the impact that deployment of an electromagnetic pulse weapon would have. Were the world to witness weapons that shut down all computers, the internet, all electric power generation, and all modern vehicles, just to name part of the list, the economy and, indeed, life as we know it, could not exist.

    There are just too many crazies in the world today for me to be optimistic.

  • Angel Martin

    Excellent, excellent article !

    Professor Meade needs to put a note in his calendar to remind us all of the reasons for medium and long term optimism. (BF for when we are in the middle of the next downturn, and everyone is forecasting the end of the world).

  • truzak

    I hate to be the fly in the soup with my pessimistic long term outlook, but as Mr. Mead says:

    “More people than ever before live in countries where they are allowed to try to improve their situation in life, and where governments are more focused on creating conditions favorable to growth.”

    Unfortunately, this does not describe the United States. Obama and his nameless/faceless bureaucrats in the EPA, DoE, and DoJ are hard at work consolidating power and controlling commerce. And let us not forget the anti-growth UNELECTED judges who occupy federal courts as appointed by Clinton and Obama who enable outlandish environmental lawsuits and fines.

    As long as Obama thinks it is a good idea to starve the US economy of oil, his Energy Secretary to drive up the price of gas, and his EPA willing to turn the central California valley into a desert to protect a fish, there is little reason to be optimistic.

    While the rest of the world may be disseminating power to the people, Obama is in the midst of transforming the US into a command-and-control economy where Washington – and not individuals – create and utilize markets to create wealth.

    People might want to make money, but when the game has been rigged against them, they have little opportunity of doing so. And if Obama gets a second term where he has “more flexibility”, we will see the second coming of a USSR-style of government before we see the second coming of Jesus.

  • valwayne

    Look up ECRI and Lakshman Achuthan. They are the experts that predicted the last two recessions and they say the U.S. is going into recession. We’ve been in a bubble created by Obama’s massive debt, wasted spending, and funny money created to support Obama’s debt. That can create a bubble, not lead to a sustained recovery. Obama hasn’t fixed anything, he’s just covered it up temporarily, and we are about to find that out. Buckle up folks!

  • tim straus

    TRUE

  • dgforbes

    Bond yields are rising sharply across Europe as people think more clearly about just how unlikely it is that the current mix of fiscal austerity and financial market life support can generate the kind of growth Europe needs.
    ——————-
    There will be no remedial growth in Europe because European electorates and their politicians have been complicit together in renouncing growth in favour of ‘fairness’. Obama is still behind the curve on this but America may not be for long if he gets a second term.
    Sixty five years of social democracy in Europe have created a philosophy of decline. Fairness is an abstract noun but pressed to define it, Europeans would say that it means that it is wrong for one person to have too much more than another, however that difference may have come about.
    Governments profess a commitment to growth but they don’t mean it as even a cursory examination of their policies shows.
    The financial crisis has revealed the hidden truth of the last two decades which is that EU countries have been living off borrowing against capital and that the capital is running out.
    U.S. egalitarianism postulated that every man should be free to succeed through his own efforts. Europe’s egalitarianism preaches that no man should be allowed to get too far ahead of his fellows. You might recognise the imprint of Marx in that.
    Britain has just undergone political convulsions because a top income tax rate of 50 pct which yielded little net revenue was cut to 45 pct. Critics said the yield was unimportant; what mattered is that poorer people should be made to feel better about themselves by seeing money confiscated from the better off.
    Europe still has a lot of accumulated capital wealth for the politicians to work their way through before Goetterdammerung arrives. But arrive it will.
    The question, when we reach that point, will be: do we become a reincarnation of egalitarian impoverishment à la Soviet communism; or do we relearn the Thatcher/Reagan virtues of freedom of the subject and of enterprise?
    For the moment, the political concensus (aka collective cowardice) is resigned to a version of the former. But let’s be optimists and remember that circumstances and a genetic sense of history gave us Thatcher/Reagan once before and could do so again.
    But we need to hope also that we haven’t left it too late.

  • Sandra Cass

    I love optimism, but it has to be based on something tangible. And to hand wave and say people are creative and adaptive is feel good but not to the point. For a world economy to grow it must grow the energy input into the economy – or it will decline. The economy is a thermodynamic engine.

    We have rather surprisingly (to some) reached the point where the master energy resource (petroleum) has stopped growing in its input to the economy. For the last 7 years!. This is unprecedented – and every government and oil company was assuring us that would never happen. Any analysis of the world economy that never mentions this is not a serious article.

  • poorboy

    Yes, energy (especially petroleum) is the long-term key for the U.S. economy. If we have enough energy, we can do whatever resource extraction, manufacturing and research we need/want to. If we have more than enough energy, we can export it and trade for other good stuff.

    Will we have enough/extra energy? YES from a reserves standpoint, MAYBE from a political standpoint. I hope our defeatist politics reverses and begins to satisfy our rational best interest.

  • Daninkansas

    Yes, the outlook is bright materially, just like 1914. Are we any wiser?