2013: When economic optimism will finally be vindicated
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.
In Capitalism 4.0, I argued that the crisis would create a new model of global capitalism, one based neither on the blind faith in market forces that followed the Great Inflation of the 1970s nor on the excessive government intervention inspired by the Great Depression of the 1930s. While this new species of capitalism would doubtless go through a painful period of evolution, its character would be fundamentally optimistic because it would be driven by four historic transformations. Those transformations helped trigger the 2008 crisis, but their roots are in the demolition of the Berlin Wall in 1989.
First, the end of the initial wave of communism created a world that was unified under a single property-based economic system. Second, the opening of China and India added 3 billion producers and consumers to global markets. Third, the revolution in information technology made globalization possible by slashing communications and logistics costs. Fourth, the worldwide adoption of pure paper money ‑ money not backed by gold, silver, currency pegs or any other arbitrary standards of value ‑ allowed governments to stabilize macroeconomic cycles to a previously unimaginable degree.
These powerful megatrends inspired economic optimism, but for that very reason they created financial bubbles, followed by inevitable busts. The tragedy of 2008 was that a blind faith in markets dissuaded governments from properly managing these boom-bust cycles, thereby creating an unprecedented financial collapse. That crisis, however, is now over. Policymakers and voters have recognized that markets cannot be left to their own devices. Economies need to be managed. As a result, a new model of managed global capitalism is evolving, and gradually replacing the market fundamentalism that dominated the world from the Reagan-Thatcher period until 2008.
My book, published in 2010, was before its time – which can be a euphemism for “plain wrong.” But events in 2013 are starting to fit into my optimistic framework for three broad reasons. Short-term cyclical forces are turning positive. Long-term trends in globalization and technology are regaining momentum. And economic policy revolutions are becoming entrenched from Washington to Frankfurt to Tokyo.
Cyclical upswings are now evident in every region of the world apart from Europe. American growth accelerated notably in mid-2012, from 1.6 percent annualized in the first half to 3.1 percent in the third quarter, and although a slowdown in the fourth quarter is likely, the reasons are strictly temporary: Hurricane Sandy and the November election. Now that big tax hikes or public spending cuts have been avoided by the “fiscal cliff” deal ‑ and the very high probability that further fiscal measures resulting from the debt ceiling showdown will not occur until 2014 or beyond – there are three reasons to expect the cyclical upswing to accelerate. Housing construction, instead of being the country’s biggest obstacle to recovery, is rising strongly and resuming its normal role as the main driver of U.S. cyclical upswings. Financial conditions are normalizing, with banks increasingly able and willing to lend. And government employment cutbacks, another big headwind to recovery, are starting to be reversed at the state and local levels.
In Asia, meanwhile, growth is rebounding after a year-long slowdown caused by the Arab Spring’s soaring oil prices, aggravated by fears of a European financial meltdown and then the surprisingly chaotic leadership transition in China. Europe is the one region possibly still condemned to another year of recession, but its troubles will have limited global impact provided a financial meltdown is avoided, which is now a good bet.
How, then, could expectations about 2013 be as gloomy as they were about 2012? The obvious answer is the uncertainty that prevailed until very recently about economic policies all over the world – about the euro, about the role of central banking, about the Chinese leadership, about the U.S. election and most recently about the fiscal cliff. The fact is, however, that these political uncertainties are largely resolved. The euro has survived because Germany has abandoned central banking taboos left over from the monetarist 1980s. President Barack Obama has been re-elected, allowing the Federal Reserve to continue its unprecedented monetary expansion.
Now that the policy questions have been largely settled, investors, businesspeople and consumers, even if they dislike some of the political outcomes, will be forced to shift their attention back to economics and business conditions. And as they do this, they will notice that economic fundamentals are actually rather better than they thought. This greater confidence will initially be inspired by short-term cyclical improvements, but as time goes on the structural changes in the world economy will again come to the fore.
Pessimists like El-Erian maintain that long-term structural changes are precisely the problem. The “New Normal” of excess debt and the failures of economic policy revealed in 2008 make weak growth inevitable for years to come. I believe, by contrast, that the trends created by the end of communism will again drive the world economy, and that new models of economic management are evolving to mitigate the failures of the old version of capitalism, which died in 2008.
Against the enormous opportunities created by the reinvention of global capitalism, the deleveraging emphasised by proponents of the New Normal will probably remain a powerful countertrend. But when the history of the 21st century is written, deleveraging will not be more than a footnote to the dominant narrative: the end of communism, the rise of Asia, the power of the Internet and the reinvention of economic management.