2013: When economic optimism will finally be vindicated

January 10, 2013

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.


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We need US Goverment who could work together with Europe to Encourage & Integrate UNITED KINGDOM and RUSSIA into DEMOCRATIC EUROPEAN UNION.

United States of America need to position itself as “Honorary Observer” or similar positions to maintain DEMOCRACY, Smooth Europe Integration, and create WORLD PEACE.

These are serious duties and not a child play for Washington Leaders.

Posted by economicmodel | Report as abusive

“Economic Optimism”??

If Economics is a science, what does optimism or any other personal belief, disposition, mood or ideology have to do with it?
Are there optimistic chemists and optimistic computer scientists?…

Posted by reality-again | Report as abusive

The idea of pure paper money can only work as long as people believe in it, and a lack of options. Transparency is dangerous with such a flimsy system. If a country were to release a currency backed by massive gold reserve, it would crush every fiat system in short order. If a country were to attempt this, it would find itself in a war very quickly. A country would do well to have a massive military build-up during a gold accumulation phase if it wanted to pull off such a global economic coup de grace as a new reserve currency with intrinsic value. I expect China will bring a scenario along these lines to fruition by 2020, unless internal strife saves us all.

Posted by Jameson4Lunch | Report as abusive

Whoo boy. Looks like it’s time to watch out for that Irrational Exuberance. From where I sit, it appears that the global financial and state sectors have done little in the way of reform since 2008 except to put a brighter shade of lipstick on the pig of Free Market Capitalism.

“Cyclical upswings are now evident …” — I’m pretty sure that means that a cyclical downswing is on the way, and they keep getting more and more swingy. But economists like Mr. Kaletsky view them as some sort of law of nature. As JK Galbraith pointed out in the 1950’s, all the lost productivity of all the slacker union workers doesn’t amount to a hill of beans compared to the productivity lost in one moderate recession. But we treat these cycles as inevitable.

Posted by Sanity-Monger | Report as abusive

Reality check, Mr. Kaletsky:

Issues 2013 by Doug Noland
January 04, 2013

http://www.prudentbear.com/index.php/cre ditbubblebulletinview?art_id=10746

Posted by PseudoTurtle | Report as abusive

Please, sir – tell me where I can get a pair of the rose-colored glasses or some of the wacky-tobacky being used to get to the wonderful prognostications in this article.

Evans of the Federal Reserve says we need a monthly increase in jobs of 200.000 – but no mention of what type of jobs those will be. Will they be full-time jobs with benefits, or more of the part-time, temporary, minimum wage jobs that do not provide enough wages to support a family? Will companies continue to put more full-time workers on part- time in order to avoid Obamacare?

We lost up to 60% of the middle-class jobs paying $13+ and the replacement of those jobs was an increase of 58% lower-paying positions. Those lower-paying jobs are not enough to support a family and that means more will have to depend on government assistance like food stamps.

But please send me some rose-colored glasses –

Posted by AZreb | Report as abusive

How about looking at emerging epochal change engines rather than past event?
For example:
1. Growing disparity between rich and poor (capital providers and corporations vs the rest) leading to social unrest and political instability
2. Lagging policies not providing sustainable solutions/policies to climate volatility and related food and water insecurity/inflation
3. Financial institutions and regulators unable to track and control HFT, growing quantitative and organizational complexity and related speculation, black boxes, dark pools, derivative markets, etc. (as opposed to focus on investment in humanity’s long-term needs)
4. Increasing weapon proliferation, cyber insecurity and small groups leverage vis-a-vis governments, destabilizing the nation state as provider of basic stable conditions for economic growth
5. Increasingly problematic ratio between natural resources and growing population with no alternatives to the combustion engine etc.
Many other trends are currently unfolding, all of which are bringing to question the capitalist paradigm and related corporate-baed globalization. And may be good in the long-run, but it is going the hurt.

Posted by Manofsteel11 | Report as abusive

[…] enero 2013. 5.- A. Kaletsky, “2013: When economic optimismo will finally be vindicated”. http://blogs.reuters.com/anatole-kaletsk y/2013/01/10/2013-when-economic-optimism -is-finally-vindicat… El autor escribe en The Economist y Reuters, y dirige el Institute of New Economic Thinking,  […]

Posted by El capitalismo (neoliberal) ha muerto. ¡Viva el capitalismo corporativista! « El teologiyo | Report as abusive