Anatole Kaletsky

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.

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.

While stock markets around the world approached their highest levels since the 2008 financial crisis, media headlines emphasized grim forebodings: Fresh stand-off looms after US cliff deal (Financial Times); Budget deal passes, debt ceiling looms (Wall Street Journal); Deal done but threats remain (Washington Post); Bigger showdowns loom after fiscal cliff deal (Reuters); House backs tax deal as next fight looms (Bloomberg).

Investors’ initial reactions are often misguided, especially to complex political events, but this time the markets will probably be proved right, and the pundits wrong. This week’s deal marked a genuine, and most likely sustainable, breakthrough for reasons of both politics and economics.

Here is a confession: I am a deficit denier.

To say this in respectable society is to be reviled as a self-serving rogue, worse than someone who denies climate change. Yet whenever I see a budget crisis — the U.S. falling off a fiscal cliff; austerity protests paralyzing Europe; Britain’s governing coalition tearing itself apart over missed budget targets -– I cannot resist the same conclusion: These countries’ leaders should take a deep breath, relax and stop worrying about deficits.

For there is actually no fiscal crisis in the United States, Britain or most European countries — including even Italy and Spain. Greece is another matter. But the very specific Greek disaster hardly justifies a generalized global panic about all government debts.

Consider some statistical facts. Interest rates are lower today than at any time in history, meaning that governments find it easier to borrow money than ever before. This hardly suggests impending bankruptcy.