It's payback time for debt-laden Americans who shopped the world to prosperity on borrowed money.
Recessions are high-profile times for economists and financial analysts. One popular focus is the shape of the recovery. Optimists think it will be V-shaped; the more cautious predict it will be U-shaped. Those who believe that house prices and the stock market are ahead of the real economy foresee a W shape. Then there's the dreaded L shape. But such speculation misses the bigger question: What will our "after the recovery" world actually look like?
Start by thinking back only 15 months: World oil prices hit $147 (U.S.) a barrel, transferring enormous wealth to oil-exporting states. Demand for raw materials (such as cement, copper, zinc, nickel and steel), combined with labour shortages, played havoc with construction projects. Global food shortages and price hikes fuelled riots in developing nations. China's embrace of market principles had transformed it into the world's workshop, displacing much of the West's labour-intensive manufacturing. India emerged as the leading global services economy.
The "after the recovery" picture will no doubt reflect some of these trends, but what will have changed? The first place to look for an answer is the country that dominated world affairs before its domestic mortgage meltdown ignited a global meltdown. Optimists remind us that the U.S. economy has always been the most resilient example of what the late Austrian economist Joseph Schumpeter labelled capitalism's "creative destruction." But current realities tell us our neighbour is unlikely to lift up the world again this time.
There is no credible scenario for turning around growth of the country's $8-trillion national debt. Huge stimulus spending and corporate bailouts are adding even more trillions, yet the Obama administration doesn't seem to have heard the adage, "When you are in a hole, stop digging." Interest payments and new spending on health care and other initiatives ensure a continuation of out-of-control, trillion-dollar-plus deficits. Some 39 American states are technically bankrupt. Meanwhile, President Barack Obama and his leftist colleagues throw sand in the gears of Corporate America, the only engine that has ever powered the U.S. economy out of peril. One of his first initiatives was a bill to remove the right of workers to a secret ballot before union certification, further reducing productivity and competitiveness. The administration's plan to double-tax foreign subsidiaries of the country's enviable stable of global companies risks the loss of important head offices. Lastly, it's payback time for debt-laden Americans who shopped the world to prosperity on borrowed money.
The United States isn't the only developed nation in dire economic straits. The U.K.'s debt- and deficit-to-GDP ratios are climbing at an alarming rate, and the populace has one of the world's highest average negative net worth per citizen. Low birth rates throughout the European Union, combined with an aging population in which 20 per cent are over the age of 60, means stifled economic growth along with the financial impossibility of maintaining social programs. Japan's chronic economic problems, meanwhile, show no prospect of improvement.
In sharp contrast, China and India are achieving growth even in the depths of a global recession, and they aren't the only rising Asian stars. In recent years, the potential of Vietnam's nearly 90 million people has been unleashed, and there is increasing realization that Indonesia, the world's most populous Muslim nation at 230 million, is on track to becoming the next Asian economic force.
The sun is also rising for resource-rich countries. Higher oil prices are reinvigorating exporters, most notably in the Mideast. Prices for base metals and other raw materials have increased, with Canada and Australia among the winners.
Think of a global economic triangle: Western consumer countries form one side, Asian workshop countries form another, and resource-producing nations the third. Before the recession, this model saw consumer goods bought by the West, manufactured in the East, using raw materials and fuel from resource countries.
But how has the West paid for these imports? By going deeper and deeper in debt. In 2008, the United States, together with Spain, Britain, France, Italy, Australia, Greece and Portugal, registered a total current account deficit of $1.3-trillion. Meanwhile, China and the oil-exporting countries registered a combined current account surplus of $1.2-trillion. (Canada's resource exports, primarily oil and gas, left us as one of the few Western countries with a current account surplus.)
Such imbalances can continue only so long as resource-exporting countries recycle their largesse back into U.S. dollars, and workshop countries continue to send their export revenues to buy the growing debt of consuming countries. (Hence, China holds mainly U.S. Treasury bills in its $1-trillion U.S.-dollar foreign reserves.)
These enormous global economic imbalances were unsustainable before the meltdown and they are even less sustainable now. So what will "after the recovery" world look like? History will record the arrival of a new world order, with global economic growth dominated by the East, while the overextended West faces the consequences of living beyond its means for far too long.
Gwyn Morgan