Wednesday, November 06, 2013

The Current Global Economic Crisis: What does the future hold and how will it affect my family

Notes of the talk by Professor Prabhu Guptara, titled "The Current Global Economic Crisis: What does the future hold and how will it affect my family", Organised by Riviera Partnerships, at the Cannes-Mougins Golf Club, near Nice, France, on 18 October 2013

Mr Chairman, Ladies and Gentlemen

It is an honour to be asked to come and present this short talk to you.

We have not recovered from the global crisis which started in 2007 (some people date it from 2008, for various academic reasons). Though it may not feel like it to you and me, it is in fact one of the worst global financial crises in history. We have tried to address the crisis mostly by printing money and keeping interest rates low, hoping that growth will return. But the crisis was itself caused by too much money too easily available, so this is like trying to treat a drug addict by giving him or her more drugs.

The result is that we are in a world where the global economy is no longer based on any fundamentals but rather on whim and momentum – and no one knows what the effect of any decision, economic or political, is likely to be. The end of tapering is announced, or the end of the US government shutdown is announced, and we have no idea whether the dollar or yen will go up or down. What will gold do? What will happen to stocks or oil or emerging markets?

The current situation can be compared to a patient who has been released from an Intensive Care Unit and the doctors would like him to exercise, but the moment he starts exercising he shows signs of abnormal increases in heart-rate and blood pressure, so the doctors must ask him to stop because they’re afraid he’ll collapse again.

Here are some facts: World output increased by 2.7% last year, this year we think it'll grow 3.1% and, if everything goes well, is expected to grow by 3.6% next year – which is not stellar, but is not bad. When we look at advanced economies, we have gone from growth of 0.9% last year to expectations of 1.8% this year and forecast 2.1% next year – even less stellar in terms of growth but, with advanced economies, it is an open question how much growth we should have. Anyway UK had zero growth last year but is expected to do 2% in 2013-14. The consensus for the Eurozone is no growth between 2012 and 2014, but my view is that a positive surprise should be expected.

Inflation can be expected to remain low and to rise gently to 2% in advanced economies.

Commodity prices should head gently down in US dollar terms.

Let me turn my attention to short term risks.

One key risk is back-tracking in the Eurozone – but this is in my view trumpeted by those who do not understand that the Eurozone is a political project, and we must understand the reality that politics always trumps economics. The Eurozone project has a history going back to 1951, and is a so-far successful attempt to build a peaceful Europe after centuries of war. So the Euro is not going to break up, and we can expect Germany to continue to pay for the continuance of the Euro, partly because that benefits German exports to the rest of Europe (that’s one key advantage of a single market), partly because it is less expensive to pay for the continuance of the Euro than to break it up, and partly because the consequence of reversing the Euro project will eventually be a return to war in Europe.

A second key risk is US budgetary problems which have, like the challenges exposed by the global crisis, simply been kicked down the road. The next deadline is February 7. My guess, which is only as good as yours or anyone else’s, is that US lawmakers will dither and shout, but will eventually kick the can further down the road, because that is ultimately the best political option before the US.

A third risk is tightening of financial policy in the US and/or other countries – but I do not see any chance of that happening at present, as the global economy as a whole is closer to stasis than it is to any chance of taking off and creating huge inflation – though that is a threat that needs to be constantly borne in mind.

A fourth risk is a cut-off in financial flows to emerging markets – and that is a question ultimately of how defensive the US, Europe and Japan wish to be. At present, there is too much money sloshing around the global system and a certain proportion of that will continue to be willing to take the risk of investing in emerging markets such as China.

The final most important risk is a rise in oil prices – and that is a question primarily of speculation and of geopolitics. We all know that oil is not that expensive to extract (in spite of the challenge of peak oil) and that the price you and I pay depends not on the cost of extraction but on the taxes that are slapped on it, as well as on oligopolic control and speculation.

From short-term risks, if we turn to medium-term risks, I guess we should mention four:

1. Will China’s attempt to transition from export-driven growth to consumption-driven growth succeed in time, and will it succeed in addressing its debt pile up, industrial overcapacity, environmental degradation and social tensions? I am a bear on China but I hope I am wrong.

2. Will Japan’s reflation drive succeed sufficiently? I think we must all be cautiously hopeful about this, as a whole generation has now grown up since the bursting of the real estate bubble and consequent stasis in the economy there since 1991.

3. Will the Eurozone continue to have 20 million or more unemployed for the foreseeable future, and what will be the socio-political consequences of that? My view is that, as long as the European welfare model holds, this challenge will be containable – though I am, as I have written, extremely uncomfortable about the introduction of robotics into white-collar and high-skill jobs, because that will undermine everything in Europe.

4. Will there be continued low growth in US and Japan for so long that it leads to pressures for debt repudiation? Well, this is the sort of risk that would be cataclysmic - and there is no way of thinking about this which is at all helpful, so all we can do is pray.

Let me now turn away from risks, whether short-term or longer term, to the trends that I see actually before us.

I see China plateauing – in fact, China has clearly come to the end of its growth model, so if we are interested in China, as we should be, we need to watch carefully what comes in a few weeks from the next meeting of the leadership of the Communist Party of China, under (China’s still-new) President Xi Jinping.

India has national elections due at the latest in this coming May, so we can’t expect any great moves, though I am impressed with what all has been done recently, and is being done. You will see a lot of depressing talk about India in the next few months. Do take it with a pinch of salt. I am betting that India’s economy will continue to improve, though the result of the national elections will be that NEITHER of the main contenders, Mr Rahul Gandhi of the Congress Party and Mr Narendra Modi of the BJP will become Prime Minister – I expect a totally fresh face (though I don’t know who).

Brazil and Russia will probably continue to do more or less as well as they are doing, though their fortunes are closely tied to commodity prices and energy prices respectively.

So it is the USA which will drive growth for the foreseeable future. In my speech at the Arizona Council on Economic Education almost exactly two years ago, I forecast that the US economy would continue to pick up gradually, provided US politicians did nothing too stupid. At that time, I was in a minority of one to hold that position, as far as I know, but that forecast has proven correct – and I still stand by it.

The Eurozone too, once it has sorted out its internal problems, will start driving global growth again. I have been giving the time-frame of 18 months for this to happen – for some years now! Progress has been very slow because everyone is fire-fighting rather than focusing on resolving Europe’s issues, such as fiscal, monetary, budgetary, banking and foreign policy harmonisation – but progress is being made on these and, if the global economy can be held steady now, I expect that at least the most important of these (excluding foreign policy) will really be resolved in the next 18 months.

That brings me to the essential question of how all that affects us as businesses, as individuals and as families. For businesses, the message is simple: as far as possible, cut risks; accumulate and deploy cash intelligently; prepare for continued volatility over the next several years – there will be no return to stability till excess cash is squeezed out of the system (which will be a long and painful process) and till we have prudential regulation appropriate for a global economy – for which, the steps that are necessary are known, but a combination of partisan lobbying and the current vulnerability in the economy have combined to prevent most of those steps from being implemented with any great vigour so far.

For individuals thinking about careers: focus on creativity and innovation (whether through technology or in other spheres), focus on logistics as supply chains will continue to be adapted to our very volatile world at least for your lifetime, focus on marketing, and focus on making the world better.

For families: expect continued and indeed increased stress on your family life, as that will be increasingly threatened by volatility and money values. It is only a laser-clear focus on values and on meaning which will hold your family together.

Which brings me, Mr Chairman, ladies and gentlemen, towards my conclusion: the world is in economic crisis because we are in a values crisis. We have gone, within a few decades, to take just the example of the USA, from “Protestant” values, to “Christian” values, to “Judeo-Christian” values, to “secular humanitarian” values, and now to aggressively “anti-religious” values - if the last is not a self-contradiction. And that transition and clash is particularly interesting because the US is, second only to India, still the most religious country on earth, where 78% of people say they believe in God and as many as 34% claim to be “born again” or evangelical Christians, but the dominant leadership of the USA exhibits little except a fixation with power, fear and greed.

The essence of the problem in the USA is a values clash, just as the essence of the problem around the world is a clash of ethics between those who would like to build a global system which simply benefits the elite (these are followers of philosophers such as Ayn Rand) and those who would like to build a global system that genuinely benefits the whole of humanity.

I hope you see that the question of values ("What is it all FOR?") is central to the challenge of the current global crisis, just as it is central to the challenge we face as families and as individuals.

Thank you.

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