Via Meadia Walter Russell Mead April 14, 2012 The World Economy: Back on the Brink? Via Meadia isn’t an economic forecasting site; if I knew what the world economy was going to be doing tomorrow I would be too busy making zillions by trading exotic financial instruments the rest of you bozos know nothing about to share my secret insights with the rest of you. (Indeed, one useful thing to remember about all economic talking heads and pundits: these are people who think they can make more money by giving their opinions rather than acting on them. If you knew what markets were going to do, you would have no incentive to share that knowledge.) But for what it’s worth, the world economy is beginning to look a little shaky again. The two problems: Europe has papered over its euro difficulties but hasn’t solved anything, and China is reaching the limits of its old development model without having found a way to shift to something new. In past decades, the relative health of the US economy might have provided enough of a global stimulus to overcome these problems, but the train is too long and the hill is too steep for the old locomotive to pull the world economy to the top of the mountain on its own. In Pharaoh’s dream, the seven lean cows devoured the seven fat ones and that is our fear today: that the parts of the world economy will bring down the successful ones. The danger is greater because the US is in the middle of its transformation from a blue model, industrial economy to something postindustrial that we don’t yet understand. The interaction of Asian, European, Latin American and Anglosphere economies also confounds policy makers. We’ve never had anything quite like the global economy in view today, with its mix of huge surplus and titanic deficit economies, with its fiat money and globally integrated financial markets. The experts and pundits stroke their chins very convincingly on TV, but neither they nor anybody else really grasps either the big picture or all the moving parts that make up the world economy today. The immediate problem is that Europe’s latest dose of pain meds is beginning to wear off. Investors are looking at the Portuguese, Spanish and Italian economies and they don’t like what they see. Nor should they. Bond yields are rising sharply across Europe as people think more clearly about just how unlikely it is that the current mix of fiscal austerity and financial market life support can generate the kind of growth Europe needs. News that China’s GDP growth has slowed _more dramatically than expected_ (http://www.forbes.com/sites/robertolsen/2012/04/13/chinas-economic-growth-sl owest-in-nearly-3-years/) also has investors worried. The political turmoil over the Bo Xilai scandal isn’t helping; China’s model requires a strong, technocratic economic management team that is able to act decisively. China’s leaders look more embattled than usual, and its not clear if the government will be able to stick to its economic playbook as it seeks to keep the population sweet. How all this plays out in the world’s volatile stock markets is not something Via Meadia can predict, unfortunately. And the long term outlook in our view remains bright. There is a vital truth about the economy that doomsayers often forget: People want to make money, are constantly looking for ways to make money, and are creative and adaptive. More people than ever before live in countries where they are allowed to try to improve their situation in life, and where governments are more focused on creating conditions favorable to growth. We have more scientific and technical knowledge than ever before, and the information revolution in particular is creating new industries and new opportunities with breathtaking speed. Given all that, optimism about the medium to long term seems like the right approach. But with the potential for rapid, transformative growth also comes the danger of growth pains. Between the Civil War and 1910 the US became the world’s largest and most advanced economy and huge new cities and industries sprang up across the country. That was also a time of painful depressions, sudden economic crises that ruined investors and bankrupted companies, and of social conflict and economic inequality. Good news for the big picture does not translate automatically into smooth and predictable economic progress in the short term. In fact, the better the big picture looks, and the more powerful are the forces pushing the world economy toward major growth and change, the more market turmoil we are likely to experience — and the harder it is for policy makers to know what to do. Growth hurts. Change brings risk. Welcome to our brave new world.
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