5 years into the Great Recession, it would be something to say that the Ugly is behind us, the Bad is with us and the Good is ahead of us. It might equally well be the reverse. Let us look at it in sequence:
Declaimer: This article written was originally in January 2013, and some of the data points may be outdated.
The Good and The Bad Looking Forward $ Backward
The Good that is already behind us: well, Europe has NOT imploded, and the US is nominally a bigger economy than it was in 2008, i.e. it is in an expansionary phase. We in India may not know what it is like to have a smaller economy than the previous year, and (thanks to inflation and an ever-rising population) we may never will. But say that to Japan and Europe, or even Greece and Italy. Oh! And yes, the world has NOT ended on 21.12.12, as promised…
The Bad that is ahead of us: all of the above (that has NOT happened) could happen this year. With Portugal, Greece, and Spain in proper depressions, Europe is definitely in a recession. Either they head towards full fiscal union or there is an exit (probably Greece, if not Spain). Both of them will be costly, but neither of these scenarios will be as bad as the one in which they have to pull along, joined at the hip, till they teeter over the abyss. With them, will go the rest of the world.
Food inflation is another big one still around the corner, and we haven’t seen anything yet. This could surface very close to your home, complete with food riots. Never forget this one…
For the developed world, it may not be food shortages, but the shortage of people to eat the food that is produced. Their demographic decline is as inexorable as Indian (food) inflation, as predictable and as unrelenting. Nothing dramatic can happen to Japan, Italy, Spain, or Germany: the workers they are going to have in 2035, should be visible on the prams of their promenades. If you look inside the prams, you can see the darkness of Germany’s future. Old stereotypes of the strong, unkind, jackbooted, ‘efficient’ German will take some time to die, just as the Japanese stereotype of global (economic) domination took a whole Lost Decade (in fact, two) to come down to the new stereotype: of a steadily dying Japan, where the reconstruction after the tsunami took 28,000 fewer houses, simply because the people to live in them were not there…
Will a dramatic shift in attitudes to immigration do the trick? The aging Europeans, who now need new immigrants to pay taxes @ 75%, so they can live off their excessive Welfare State, will face the same questions from their new citizens that their own Immigration Officers used to ask the typical Sardarji as he tried to enter Britain: have you come to live off Welfare? Can you pay for your ticket back home?
This time, aging Europeans, the last of the bombed-out “old Europe” who will be waiting in their wheelchairs as they are swamped by immigrants from Algeria, Turkey, and Sudan, will be asked the same questions…..or wait a minute, maybe the said immigrants will choose to stay at home. Is that so unlikely?
How to Fertility rates in the US Have dropped below replacement level
Fertility rates in the US have dropped below replacement levels, from 2.1 to 1.9, because immigrants, especially Hispanics, are returning to Mexico and Latin America, where their domestic economies are doing much better than the US. We know that a lot of Indians are coming back; I have often wondered about emigrating to China if I could. Who would want to go to Europe then?
The Ugly that is behind us, with us, and ahead of us: well, it started with Lehman and the housing crisis, is present with Greece and Spain, and could in the future come from Japan and maybe Italy. India too, where one disastrous monsoon could send this country into a death spiral.
Ugly could come from a lot of places; the Middle East, Europe, South Asia, and any of a multitude of geopolitical hotspots, e.g. Afghanistan, Syria, Pakistan, or Central Asia.
The Bad that is already behind us: this would be quite a long list, and might lull you into thinking that the worst is over. First on this list would be the housing crisis, which seems to have truly bottomed out. Then comes the debt overhang, which has been reduced somewhat, although it is still holding back some sectors. Prominent in this are mortgage finance, credit cards, and consumer durables. Corporate debt in the US is at all-time lows, with cash holdings at all-time highs. I don’t know where to put unemployment, and I have put it behind us on balance.
Notice that almost NOTHING from Europe is included in this paragraph. One can’t be sure about European integration, of the fiscal kind, the bank supervision kind, or even a break-up (which would itself be a coming together of sorts, at least for Northern Europe). Even the debate on austerity is NOT behind us; there is no certainty about anything, even German commitment to Europe.
Lastly, I wish I could say the same about Indian policy gridlock…
The Good that is ahead of us: this is a long list, especially since most of it is more than a year into the future. But it makes for some optimistic thoughts in the New Year…
Energy Prices driven by shale gas natural gas and new oil discoveries
Energy prices are driven by shale gas, natural gas, and new oil discoveries. This will impact geopolitics, and of course, economics in a way that has never happened before, Solar is further away, but lower energy prices are around the corner, visible to all now. Coal prices have dropped by a quarter, as the US goes out of the coal market, and turns net exporter (~100mn tonnes, compared to 311 mn tons of Indian production). Europe is seeing a temporary upsurge in coal demand as renewables production takes away the lucrative daytime electricity usage; but as gas transportation infrastructure improves and gas prices drop (because of American imports & Russian production, besides some Polish shale gas), coal usage will come under pressure.
While China, Australia, Poland, Mongolia, and Latin America (Argentina, Brazil, and Mexico) might see a piece of the shale gas action, India will have to wait for the Solar boom, which may take more time in coming but will be surer and more tectonic. It isn’t happening in a hurry, but the rise of energy independence will coincide with the coming of deleveraging, which will correct major global imbalances.
An important change is coming up in our attitude to debt. All kinds of indicators of asset creation (from Fixed Asset creation to Savings: Investment ratios) are falling inexorably, along with personal and corporate debt ratios. Cash is king, even as the spigots are turned up by Central Banks, velocity (of money) ratios are dropping like a brick. Perversely, Indian fiat money is so distrusted that it has led to huge real estate holdings with vacancy ratios that are creating our version of ghost towns….and all this is being done without leverage. Something similar is going to happen in the US, I would imagine…as the Dollar’s credibility comes abreast of the Rupee, and as real estate gets cheap.
So population decline, falling levels of personal debt, the plummeting velocity of money, rising productivity and technical innovation would all point to rising levels of net personal welfare, but for whom? It won’t be for the currently rich but growing old; more likely, it will benefit the currently poor, but growing young. It might not even benefit specific countries, for those of you who think that India qualifies in the latter group….but the actual people. Think of the poor Egyptian, who gets welcomed into Europe to pay taxes to feed some aging German; hardly fulfilling a dream for the Egyptian or the German. The great leveler will be wage inflation, which will eat away past savings and generate new taxes to pay off all those mountains of Govt debt: I hope to God the Egyptians still like gold.
One last thought: how long before we see “moderate Islam”, that great innovation pioneered by Bangladesh, Indonesia, and Turkey, perhaps even India? Did you realize that is half the population of Muslims in this world?