Prime Junta
RPGCodex' Little BRO
- Joined
- October 19, 2006
- Messages
- 8,540
We are now in a depressed economy.
That means that we've gone through the looking glass: virtues are vices, vices are virtues, and we're going to have to run as fast as we can just to stay in the same place.
Left to itself, the world economy will enter a vicious circle. As demand goes down, production will cut supply and cut costs. That means people will get fired, and prices will go down. That means that people and companies will want to save rather than spend, which further depresses demand, which causes further cuts, further deflation, and further layoffs. If the spiral is not broken, it will eventually bottom out, but not before we see something very much like the Great Depression -- unemployment rates of 25% or so, soup kitchens, the works, with possibly a world war or two thrown in.
The good news is that the reflexive policy responses around the world have been, largely, the right ones: coordinated action on monetary policy, some coordination regarding fiscal stimulus, international political crises swept under the rug (Russia and the West are talking again), with no huge pressure for beggar-thy-neighbor protectionist policy responses that would only make this worse for everyone.
But even if everyone does everything by the book, 2009 is going to be very, very ugly.
The reason is that we have problems on three levels: financial, fiscal, and structural.
The financial level requires a monetary response -- throwing money at banks to prevent the financial system from melting down completely. (If it does melt down, the crisis in the real economy will go ballistic.) That level appears to be under control for the moment, and there's a good chance that the Powers that Be will know what to do to keep it that way. But that's not enough.
By the fiscal level, I mean the problems inherent in a depressed economy -- that vicious deflationary cycle I outlined above. We know, in theory, how this level can be addressed too: government has to spend like a drunken sailor, it doesn't really matter on what.
The twist is that in today's globalized economy, fiscal stimulus will very quickly bleed out of any country that does it. It'll only work if everybody does it at once -- and any individual country opting out of it will benefit at the expense of others (since it'll benefit from the stimulus done by everyone else, without having to carry any of the cost). This kind of thing is also politically rather difficult, especially in countries like the US, which are culturally leery of massive government spending programs.
And, of course, this level of fiscal stimulus will run up a bill that will have to be paid, sooner or later. Countries that have behaved responsibly as the economy was growing (Russia, China, much but not all of Western Europe) will be in a much stronger position than countries who didn't (the USA, Eastern Europe, etc.). But for one and all, the cost will be a drag on the economy for decades.
Also, fiscal stimulus takes time to work. According to Paul Krugman, there are only a few tens of billions worth of "shovel-ready" programs in the US. That means that the effects of the kind of fiscal stimulus that's needed (we're talking maybe a half a trillion for the US alone) will only really be felt in 2010 at the earliest. Until that bites, the economy will be in free-fall.
If today's employment numbers indicate what's in store for the future, 2009 in the US will see double-digit unemployment, and it won't be until mid-2010 in the best case that things will start to look up. That means that emergency unemployment benefit programs are required -- both to prevent the unemployed from sliding into poverty during the recession/depression and to keep them consuming: if they're destitute, they'll be further dragging down the economy. Unemployment benefits are very good fiscal stabilizers, since they come into play immediately when the economy turns down.
Finally, the structural level.
The big structural problem in the global economy is USA/China. The USA has been consumption-driven -- and the consumption has been debt-driven. China has been export-driven -- and the exports have been driven by US consumption. This imbalance will have to be corrected: China will have to find a way to increase domestic demand so that it won't have to run a gigantic permanent trade surplus to survive, and the US will have to increase exports and decrease imports enough to bring trade into rough balance.
The underlying structure of this imbalance is the status of the dollar as the world's reserve currency. That will also have to change -- preferably in favor of a more multilateral system. I would hate to have the euro take its place, since it would just recreate the same distortion in a different place.
So, the outlook.
The crisis started in the USA, and USA will continue to be the epicenter. Much depends on how successful the Obama administration is at addressing the crisis. He's certainly chosen just about the best possible team in the world for the job -- if they can't do it, then I doubt anyone can. But even in the best case, 2009 will be a terrible year. My crystal ball shows double-digit unemployment by December 2009, a budget deficit near $1T, and national debt near $12T.
China will see its massive currency reserves melt. It'll be rebuilding after the earthquake (which will be very effective stimulus), and readjusting frantically to cope with a crash of its export sector. If they succeed, they may come out of the crisis with their cash reserves depleted but otherwise in pretty good shape; if they fail, they'll be stuck with a combination of ecological catastrophe, financial ruin, and mass unemployment with everything that entails.
The EU will see itself politically strengthened. Sweden, Denmark, and Iceland will be scrambling to join the eurozone (they're currently spending tremendous amounts of money to defend their currencies; this money would be much better used as stimulus in their economies, and the relatively stable euro is suddenly looking a lot more attractive). The crisis will also leave behind much stronger structures for cooperation -- and a precedent for doing so. Euroskeptics were predicting that the euro -- a currency with a central bank but no central fiscal policy -- is fundamentally untenable; instead, its first major crisis is demonstrating that it's much stronger than the alternative. There's no sudden nostalgia for the good old days of small national currencies; instead, the contrary is true.
However, it's also likely that there will be internal differentiation within the EU: a "core" consisting of countries both within the eurozone and the Schengen system, a "semi-core" consisting of countries that are in Schengen but not the eurozone, a "periphery" consisting of countries that are in neither, and a "hang-around club" of countries that aren't EU members but are closely integrated with it. The UK will remain something of a special case, as it's the only major economy that's outside the EU core.
We'll see a dynamic where countries will want to move towards the core, but entry barriers will become higher. Those countries that are currently out of the core by choice rather than necessity will probably move to join it (Sweden, Denmark); those that are out because they don't make the grade will find it even more difficult to gain entry.
Russia will find itself screwed (again), but with a number of unique strengths: from their POV, if there's electricity from the socket, food in the stores, heating from the radiators, and the Germans aren't invading, it doesn't really count as a crisis, which means that while they'll have to do some pretty wild gyrating to adjust to the crash in energy prices, they're very well equipped psychologically to deal with it.
And finally: the developing economies will, as usual, get the worst of it.
That means that we've gone through the looking glass: virtues are vices, vices are virtues, and we're going to have to run as fast as we can just to stay in the same place.
Left to itself, the world economy will enter a vicious circle. As demand goes down, production will cut supply and cut costs. That means people will get fired, and prices will go down. That means that people and companies will want to save rather than spend, which further depresses demand, which causes further cuts, further deflation, and further layoffs. If the spiral is not broken, it will eventually bottom out, but not before we see something very much like the Great Depression -- unemployment rates of 25% or so, soup kitchens, the works, with possibly a world war or two thrown in.
The good news is that the reflexive policy responses around the world have been, largely, the right ones: coordinated action on monetary policy, some coordination regarding fiscal stimulus, international political crises swept under the rug (Russia and the West are talking again), with no huge pressure for beggar-thy-neighbor protectionist policy responses that would only make this worse for everyone.
But even if everyone does everything by the book, 2009 is going to be very, very ugly.
The reason is that we have problems on three levels: financial, fiscal, and structural.
The financial level requires a monetary response -- throwing money at banks to prevent the financial system from melting down completely. (If it does melt down, the crisis in the real economy will go ballistic.) That level appears to be under control for the moment, and there's a good chance that the Powers that Be will know what to do to keep it that way. But that's not enough.
By the fiscal level, I mean the problems inherent in a depressed economy -- that vicious deflationary cycle I outlined above. We know, in theory, how this level can be addressed too: government has to spend like a drunken sailor, it doesn't really matter on what.
The twist is that in today's globalized economy, fiscal stimulus will very quickly bleed out of any country that does it. It'll only work if everybody does it at once -- and any individual country opting out of it will benefit at the expense of others (since it'll benefit from the stimulus done by everyone else, without having to carry any of the cost). This kind of thing is also politically rather difficult, especially in countries like the US, which are culturally leery of massive government spending programs.
And, of course, this level of fiscal stimulus will run up a bill that will have to be paid, sooner or later. Countries that have behaved responsibly as the economy was growing (Russia, China, much but not all of Western Europe) will be in a much stronger position than countries who didn't (the USA, Eastern Europe, etc.). But for one and all, the cost will be a drag on the economy for decades.
Also, fiscal stimulus takes time to work. According to Paul Krugman, there are only a few tens of billions worth of "shovel-ready" programs in the US. That means that the effects of the kind of fiscal stimulus that's needed (we're talking maybe a half a trillion for the US alone) will only really be felt in 2010 at the earliest. Until that bites, the economy will be in free-fall.
If today's employment numbers indicate what's in store for the future, 2009 in the US will see double-digit unemployment, and it won't be until mid-2010 in the best case that things will start to look up. That means that emergency unemployment benefit programs are required -- both to prevent the unemployed from sliding into poverty during the recession/depression and to keep them consuming: if they're destitute, they'll be further dragging down the economy. Unemployment benefits are very good fiscal stabilizers, since they come into play immediately when the economy turns down.
Finally, the structural level.
The big structural problem in the global economy is USA/China. The USA has been consumption-driven -- and the consumption has been debt-driven. China has been export-driven -- and the exports have been driven by US consumption. This imbalance will have to be corrected: China will have to find a way to increase domestic demand so that it won't have to run a gigantic permanent trade surplus to survive, and the US will have to increase exports and decrease imports enough to bring trade into rough balance.
The underlying structure of this imbalance is the status of the dollar as the world's reserve currency. That will also have to change -- preferably in favor of a more multilateral system. I would hate to have the euro take its place, since it would just recreate the same distortion in a different place.
So, the outlook.
The crisis started in the USA, and USA will continue to be the epicenter. Much depends on how successful the Obama administration is at addressing the crisis. He's certainly chosen just about the best possible team in the world for the job -- if they can't do it, then I doubt anyone can. But even in the best case, 2009 will be a terrible year. My crystal ball shows double-digit unemployment by December 2009, a budget deficit near $1T, and national debt near $12T.
China will see its massive currency reserves melt. It'll be rebuilding after the earthquake (which will be very effective stimulus), and readjusting frantically to cope with a crash of its export sector. If they succeed, they may come out of the crisis with their cash reserves depleted but otherwise in pretty good shape; if they fail, they'll be stuck with a combination of ecological catastrophe, financial ruin, and mass unemployment with everything that entails.
The EU will see itself politically strengthened. Sweden, Denmark, and Iceland will be scrambling to join the eurozone (they're currently spending tremendous amounts of money to defend their currencies; this money would be much better used as stimulus in their economies, and the relatively stable euro is suddenly looking a lot more attractive). The crisis will also leave behind much stronger structures for cooperation -- and a precedent for doing so. Euroskeptics were predicting that the euro -- a currency with a central bank but no central fiscal policy -- is fundamentally untenable; instead, its first major crisis is demonstrating that it's much stronger than the alternative. There's no sudden nostalgia for the good old days of small national currencies; instead, the contrary is true.
However, it's also likely that there will be internal differentiation within the EU: a "core" consisting of countries both within the eurozone and the Schengen system, a "semi-core" consisting of countries that are in Schengen but not the eurozone, a "periphery" consisting of countries that are in neither, and a "hang-around club" of countries that aren't EU members but are closely integrated with it. The UK will remain something of a special case, as it's the only major economy that's outside the EU core.
We'll see a dynamic where countries will want to move towards the core, but entry barriers will become higher. Those countries that are currently out of the core by choice rather than necessity will probably move to join it (Sweden, Denmark); those that are out because they don't make the grade will find it even more difficult to gain entry.
Russia will find itself screwed (again), but with a number of unique strengths: from their POV, if there's electricity from the socket, food in the stores, heating from the radiators, and the Germans aren't invading, it doesn't really count as a crisis, which means that while they'll have to do some pretty wild gyrating to adjust to the crash in energy prices, they're very well equipped psychologically to deal with it.
And finally: the developing economies will, as usual, get the worst of it.
- Joined
- Oct 19, 2006
- Messages
- 8,540
)