Whisper it softly, but the age of government austerity is ending. It may seem an odd week to say this, what with the U.S. government preparing for indiscriminate budget cuts, a new fiscal crisis apparently brewing in Europe after the Italian election and David Cameron promising to “go further and faster in reducing the deficit” after the downgrade of Britain’s credit. But politics is sometimes a looking-glass world, in which things are the opposite of what they seem.
Mirror, mirror on the wall, who’s the weakest of them all? As G20 finance ministers warn of the threat of a “global currency war” at their meeting in Moscow this weekend, two odd features of this looming financial conflict tend to be overlooked.
Wednesday night may have marked the “emperor’s new clothes” moment of the Great Recession, in which the world suddenly realizes its rulers are suffering from a delusion that doesn’t have to be humored. That delusion today is economic fatalism: the idea that nothing can be done to break the paralysis in the global economy and therefore that a “new normal” of mass unemployment and declining living standards is inevitable for years or decades to come.
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.
As 2012 draws to a conclusion, it’s likely that the fiscal cliff will be averted, U.S. politics and monetary policy are irrevocably set, European politics are suspended until September’s German election and the Chinese leadership transition is over. In short, the political and monetary uncertainties that have obsessed financial markets and paralyzed business have all been dispelled. As a result, 2013 promises to be a year for businesses and investors to focus again on economic fundamentals and corporate performance instead of delaying decisions while they waited with bated breath for the next euro summit, or election, or meeting of the Federal Reserve and European Central Bank. In one part of the world, however, events are moving the other way.