Satyajit Das Presents a Global Economy Health Check
Mr. Global Economy gets a metaphorical physical and psychological examination. Here are the results.
Physical examination revealed that the US is in marginally better condition than other organs – the “cleanest dirty shirt” is the expression. Despite a US$1 trillion annual budget deficit (6% of GDP) and zero interest rates, growth is a tepid 2%.
The housing market’s rate of descent has been arrested, but prices remain 30%-60% below highs. New housing starts have stabilized at around 50% below peak levels. Benefiting from a weaker dollar, manufacturing has improved. Lower oil and natural gas prices have benefited the economy.
Employment remains weak. If discouraged workers who have left the workforce and part-time workers seeking full time employment are included, then unemployment is over 15%, well above the headline 8% rate. The total number of Americans now employed is around 140 million, well below the peak level above 146 million.
Consumer spending remains patchy. Job insecurity, lack of earnings, and wealth losses are causing households to reduce spending and repay debt.
Record corporate profits have been achieved mainly through cost reductions and minimal revenue growth. Investment is weak due to the lack of demand.
Bank lending is sluggish due to lower demand for credit and problems of financial institutions.
Federal public finances remain unsustainable. Hardening of the political arteries means that there is little resolve to deal with deep-seated problems. There is the risk of a “fiscal cliff” episode.
If there is no political resolution, then automatic tax increases (non-renewal of tax cuts) and spending cuts equivalent to about 5% of GDP, mandated under the 2011 increase in the national debt ceiling, will automatically occur. This would mean a contraction equivalent to more than US$600 billion in the first year and US$6.1 trillion over 10 years. This would improve the budget deficits and slow the growth in debt, but adversely affect growth.
State and municipal finances are also under stress, with an increasing number of borrowers filing for bankruptcy.
Other Developed Organs
Many European countries have high debt levels, budget and trade deficits, social spending inconsistent with tax revenues, poor industrial competitiveness (with some exceptions), a rigid monetary system, and inflexible currency arrangements. This is compounded by weaknesses of the European banking system with large exposure to sovereign bonds issued by peripheral nations.
Intellectually and institutionally, Europe is unable to deal with its debt crisis. Europeans believe stabilization and recovery can be achieved through greater integration. Even if issues of national sovereignty can be overcome, integration will not work. Unsustainable levels of debt do not magically become sustainable by changing the lender or guarantor. The monetary arithmetic of European debt problems is that the EU and Germany, its main banker, do not have enough funds to rescue the beleaguered eurozone members.
Austerity dooms Europe to a prolonged and severe recession as the debt burden is worked off. The alternative, a debt write-off, would result in a significant loss of wealth for the mainly Northern European lenders, which would trigger an economic contraction and a prolonged period of economic stagnation.
Japan is in a state of advanced atrophy, despite decades of therapy. The temporary rebound, mainly the result of the recovery from the tragic tsunami and government spending, is running out of steam. The political system is even more blocked than that of the US, allowing only a trickle of oxygen to circulate, thus impairing function.
Japan’s primary investment merit is that almost all possible man-made and natural disasters have happened and the worst is factored in.
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