On the one hand, the developed world has placed itself on a dismal trajectory in its effort to avoid the pain of constructive solutions to enormous economic problems, with the result of kicking those issues into 2013 and beyond, as I predicted throughout this past year. On the other hand, in the United States, an electorate rejected—rather decisively—a stale and adulterated set of economic solutions that had a three-decade track record of failing to deliver anything but one economic crisis after another, confirming that a democratic polity can eventually be relied upon to take competent measure of things. I am far more optimistic about the latter confirmation than the accuracy of my predictions relative to the former.
As one who believes that meaningful change to, and repair of, economies faced with systemic dilemmas can occur only when no other choice exists, we nonetheless managed to delay repair, instead opting for another twelve months of unprecedented central bank money pumping (in all its guises, conventional, quantitative and credit easing) throughout the developed world.
One year ago as of this writing, in December 2011, the European Central Bank pulled Europe—and the world—back from the brink, with its initial round of Long Term Refinancing Operations (LTRO), which was repeated with a second round in February of 2012. In the United States, the Federal Reserve Bank signaled and then commenced its third round of quantitative easing since the beginning of the financial crisis—and pursued an ever-more-aggressive policy of setting market expectations regarding the continuation of easy money policy. Finally, this past weekend, the Japanese people returned the previously notorious Liberal Democratic Party to power by a landslide—which promises to reopen the spigots of fiscal stimulus and will pressure the Bank of Japan to do the same in the monetary realm (where it was the first to tread into the now commonplace realm of unconventional easing, well before the present financial crisis).
Yet, as Japan itself has demonstrated through two decades of economic stagnation, deflation, and nominal contraction, the developed world is in a conundrum that cannot be resolved through mere monetary stimulus, or even certain untargeted kinds of fiscal stimulus. Such stimulus is useful in restarting a slumping economy after a cyclical slump—and it can certainly keep alive (as it has in Japan) sclerotic but otherwise relatively wealthy nations for a time. But this time really is different.
The problems faced by the developed world continue to fall into the rubric of global oversupply of labor, productive capacity, and capital that began about a decade after 3.5 billion people joined the free market with the end of state planned socialist economies and began competing fully with the 800 million people in the advanced nations. The dislocations wrought by this underappreciated cataclysm have resonated through our developed economies for years in the form of job losses, asset bubbles, financial panics, and income and wealth polarization punctuated by the continuing decline of real median incomes and the inability of families to maintain real and perceived economic stability. Some point out the exceptions of Japan and Germany. But in the case of Japan it is because wages and prices (to say nothing of assets) have been deflating for 15 years, and in the case of Germany because of a highly artificial currency union that has transferred global effects to the over consuming southern “periphery” of the Eurozone and maintained the illusion of self-generated surplus and prosperity in Europe’s manufacturing hub.
By avoiding the real problems, little was done to address the larger issue, and some still believe—against all contrary evidence—that all that we need to do is to wait out a severe cyclical slump and the magic of the markets, the re-emergence of a confidence and animal spirits, will come to the rescue. And to accelerate that coming, many in the developed world have proffered, and often enacted, prescriptions of sovereign fiscal austerity. And some, like Germany, have even sought to restrain the monetary interventions that have been the only thing standing between our artificial stability and renewed crisis—options that are now laying at the doorstep of the United States in the form of the mutually assured destruction pact entered into during 2012, the (inaccurately) so-called fiscal cliff.
The symptoms of the renewed economic crisis that will emerge if we do nothing more that continue to “pray and delay” may present themselves in forms other than declines in financial markets and anemic real economic outputs—forms that history has demonstrated can be quite insidious. In the final month of 2012 in the United States, we were confronted by yet another in a series of violent challenges to the societal fabric of the developed world in terms even more disturbing——the bloody murder of our youngest children and their teachers in an elementary school in Newtown, Connecticut.
This was yet the latest of several mindless killings of innocents in the United States over the past two years. While it is tempting to cite the actions of individual madmen or, as many Europeans are fond of reminding Americans, the easy access to handguns in the United States, (although I am less sympathetic to that argument since the events in Norway in 2011) I offer another explanation.
In all parts of the world, developed or otherwise, economic enfranchisement is part and parcel of developing and maintaining stable, democratic governance, and the rule of law. For if a large segment, especially a majority, of the population is stripped of sufficiently consistent employment that afford the basics of financial stability that is not so far below that of its broad economic elites (not the top 0.01 percent, 0.1 percent or 1.0 percent, but using the top 10 percent as a benchmark), the social fabric of that country will eventually tear at its seems as frustration and deprivation build. Clearly, 2012 has seen more than a mere fraying at the edges of adverse socio-economic behavior.
All of which brings me back to my core belief that, in a democratic society, the polity eventually “gets it.” In the United States, the performance of the economy was certainly bad enough to justify “throwing the rascals out,” as the Japanese have just done, and the Greeks and Spanish did earlier in 2012. But the alternative was not connecting, and its message was only to repeat the failed supply-side policies of the past in a global environment so obviously beset by oversupply. The electorate in the United States may not have seen that nuanced argument, but they did see a pig in a poke and rejected it.
The rejection of failed policy is a beginning, but the real challenges are still in front of us for 2013. Repairing the developed economies will require more than mere platitudes about inflation targeting and nascent recoveries. It will require an acknowledgement that the enormity of force represented by the emerging powers will necessitate movement away from business as usual in the advanced nations and the prior passive conduct of multilateral economic relations. I only hope it doesn’t require another financial crisis or continuing challenges to social harmony.
By the way, I am writing a book on the radically changed global economy and what I believe to be the needed solutions which may, at least I hope, lead to a more constructive and needed dialogue in 2013. It is slated to be published in June, although after the events of 2012 I wish I had written it sooner.