The good, the bad and the global economy
Everyone knows the world’s economies are becoming ever more intertwined, but we’re only just starting to understand the ripple effects.
Welcome to the new global economy: One guy sneezes, and someone else gets a cold. That’s what we’re seeing in the slowdown now happening in the U.S., in Europe and in emerging market countries all around the world. Barring some kind of radical decoupling, the tight correlation in fates between these economic titans is a phenomenon we had better get used to, and understand, because it’s not going away. Indeed, this fact by itself – that our world is operating more and more like one big system every day – is not all bad news. However, a word of caution: Where interconnectedness yields benefits, it also creates pitfalls. Let’s look at a few examples of how this global system is actually working in our favor.
First, take the recent drop in U.S. Treasury yields. This is the more important macroeconomic story in America right now. Can any politician, with a straight face, continue to claim that getting the Simpson-Bowles recommendations passed into law was any kind of imperative for Congress or the president? The continual driving down of lending costs for the U.S. has made a mockery of credit-rating agency warnings and any perceived threat that a downgrade once held for the U.S. economy. Indeed, it takes some of the air out of the big debt-ceiling showdown that is set to take place between Democrats and Republicans in January 2013, when the $110 billion-dollar budget reduction is set to take automatic effect. It becomes increasingly hard to argue that reducing the deficit is priority number one to getting the country back on track when the cost of lending is so incredibly cheap and when the world’s investors are telling the U.S. they want more, not less of it.
Now, the low cost of lending today is not to say that the U.S. should be running up the debt, nor does it mean Washington can avoid addressing its structural spending issues – it very much can’t. But is now the right time to do that? For those who claim we should be listening to the signals the markets give us, it’s clearly not the right time to be cutting back on spending.
But now let’s consider the U.S. debt ceiling in light of the never-ending drama that is the euro zone crisis. There’s a growing sense in the U.S. and on the Continent that America has wasted its financial crisis. Its banks are bigger and seemingly more powerful than ever. (See Jamie Dimon’s Senate testimony, where he mostly had our public servants, some of whom are his former employees, wrapped around his little finger.) Meaningful financial regulatory reform still feels ephemeral at best, the economy is recovering only in fits and starts, and yet the entire country seems indignant that the whole thing isn’t moving along faster. In Europe, to the contrary, nothing is healed, and little has been reformed, and politicians there, led by Germany’s Angela Merkel, continue to insist that no zone-wide bailouts are coming until the peripheral countries set their own fiscal houses in order.
In other words, we’re seeing two very different approaches to the same basic problem of structural, long-term overspending play out in the US and Europe (though the two crises are very distinct on a number of levels). It’s too early to tell if the European approach will work better than the U.S. one, but the Europeans have already managed to install technocratic governments in Italy and Greece, force austerity measures on to much of the periphery, and change the very tone of the discussion from a short-term bailout to a long-term structural fix. It seems that although it was Rahm Emanuel urging President Obama to never let a crisis go to waste, his message actually reached the ears of Merkel and Italian Prime Minister Mario Monti instead.
Here’s the thing: Even if the tables were turned, and the U.S. was squeezing banks incrementally while Europe took on a trillion-euro bailout in one fell swoop, neither economy would likely be much further along on recovery than it is today. These things simply take time – national economies, like aircraft carriers, don’t turn on a dime, and the crossover effects from one economy to the other might take years to manifest themselves. In that way, there’s a measure of safety in our mutual crises and the journey out of them, as the worst (and best) outcomes are softened.
But remember those potential pitfalls of our newly interconnected world?
The economy that should scare us the most right now is the Chinese one. The country is slowing down, and that’s precisely because of the halting recovery and weakness in the U.S. and European systems, and the fact that the sputtering has been going on for some time. The U.S. and Europe can wait out our own recoveries. Our advanced economies are resilient. Even in the depths of our crises, the economic suffering, though real, has been muted. But China, despite its rapid modernization, is still, structurally, an emerging market. It’s far more vulnerable to economic shocks. And its political system, already facing turmoil in advance of that country’s leadership changeover later this year, is far more unstable than those in the West. If the developed world stops buying the stuff that China makes, it will force China to turn inward and double-down on state capitalism.
That would be dangerous for U.S.-China relations for a dozen reasons. Here are two of them: If China increasingly looks to state capitalism to sustain its growth, it will put it more at odds with free-market capitalism abroad – and thus, the United States. On top of this, any domestic instability could lead to a more bellicose Chinese foreign policy to drive nationalistic sentiment. The bottom line: We’d see an economic problem start to turn into a political one. The West can limp along, in other words, for some time. It can bungle parts of the recovery, make mistakes, watch job numbers grow and shrink, and still, in all likelihood, come out all right in the end. But when Europe sneezes, it’s not the other developed economies in the world that will fall ill. What we haven’t yet seen happen in this truly global crisis is the contagion spread from the developed world into still-developing economies. Europe and the U.S. might be sneezing, but if they don’t get themselves on the mend, it’s China – the single biggest buyer of U.S. debt, mind you, that might end up contracting the flu. And that’s just one, knowable risk of our new global economy. Who knows what others there may yet be?
This essay is based on a transcribed interview with Bremmer.