The U.S. economy has just suffered its first contraction since 2009, consumer confidence has plunged since November’s election and Americans’ paychecks are only just starting to reflect an increase in payroll taxes averaging $70 per month. Across the Atlantic, the euro zone and Britain seem to be sinking back into recession. And conditions in Japan have become so desperate that newly elected prime minister Shinzo Abe is openly devaluing the currency and threatening to take direct control of the central bank.
The House of Representatives decision to suspend the U.S. Treasury debt limit is the most important political event in America since President Barack Obama was first elected in 2008. As anticipated in this column immediately after the 2012 election, Washington seems to have broken its addiction to deadly games of economic chicken. That, in turn, should mean an orderly resolution of all U.S. fiscal problems and perhaps even an outbreak of bipartisan political cooperation, at least on economic issues, of a kind not seen in Washington since the early 1990s.
Editor’s note: After this column was published, Cameron announced he would be delaying his speech in Amsterdam due to the hostage crisis in Algeria.
Will the world economy be in better shape in 2013 than 2012? The Economist asked me to debate this question with Mohamed El-Erian, chief executive officer of PIMCO, the world’s biggest bond fund. El-Erian is the author of When Markets Collide, a brilliant book that coined the term “New Normal” to describe the world’s inevitable descent into a Japanese-style era of stagnation after the 2008 financial crisis. I was delighted by the invitation because I wrote a book at about the same time, taking a very different view of the crisis – and many of my predictions finally look like they will be realized in 2013.
The U.S. fiscal cliff was dodged in pretty much the way that seemed most likely after November’s election: a bipartisan deal in which pragmatic Republicans, no longer focused on ending the presidency of Barack Obama, joined moderate Democrats to prevent economic sabotage by extremists from both ends of the political spectrum. On Wall Street, the immediate reaction was euphoria. But among mainstream economists and political commentators in Washington, it was cynicism.