Who Will Lead Us Out of the Recession?
Yea, though we walk through the valley of the shadow of debt?
Should we fear no evil? Who will lead us?
And, when will the Dow Jones Industrials runneth over?
Economists are reluctant to predict recessions for fear of creating self-fulfilling prophecies. Nevertheless, the August 6-12 issue of The Economist raised the probability of a double-dip recession to 50%. And, we have not recovered from the first recession. American output remains below the 2007 peak, and per capita Gross Domestic Product (GDP) is the same as the second quarter of 2005. We are in the sixth year of the lost decade.
The consumer sentiment, reported on August 12th, was the lowest in more than 30 years. London’s Financial Times (8/12/11) reported that 77% of businesses surveyed expected the global economy to be the same or worse in the next six months. Among the 23% who expected the global economy to be better were Asian companies. In 2012, the National Bureau of Economic Research (NBER) will likely report that the second recession began this quarter. It will limited to the developed nations.
The developed nations – principally the United States, the European Union and Japan – account for about 60% of global GDP. These nations are all burdened with excessive
debt and insufficient leadership. Short-term government spending would spur economic growth. Cuts in spending will place a drag on economic growth. Politics favors cuts, which will exacerbate the economic situation.
Leadership is the other problem. The developed world is led by the odd couple: Barack Obama and Angela Merkel. Both have unique characteristics. Obama is the first black American to be president. Merkel, who was born in East Germany, is the first female to be chancellor. Obama is an attorney and Merkel is physicist. Both have strong intellectual capabilities and both are deliberative thinkers.
Unfortunately, both act more as a mediator than a leader at a time when strong leadership is necessary. The center-right Financial Times (8/5/11) stated, “Nothing can be settled in the Eurozone without the approval of the German chancellor. The president’s signature was required on an agreement to life the US debt ceiling. Yet neither has shown anything much resembling leadership in shaping the outcomes.”
On August 11, 2011, eight Republican presidential candidates debated in Ames, Iowa. They were asked if they were president, would they approve or veto a deficit-reduction
bill that included a tax increase spending cuts equal to ten times the amount of the tax increase. All eight said they would veto it. They would rather go against American public opinion than against Grover Norquist (Americans for Tax Reform), revealing their lack of leadership on this critical issue.
Who, then, will lead us out of recession? By default, it will have to be the emerging
market nations, particularly the Asian nations. In 2009, to combat the “Great Recession,” they engaged in massive fiscal stimulus programs in transportation, education, energy and housing. In 2010, China, India, South Korea, Taiwan and Singapore grew an average rate of more than 10%. Nevertheless, because the emerging market countries represent a smaller share of global GDP, recovery will be slow.
The rise of China and other emerging market countries is inevitable. A decade ago, the consensus forecast was that China would pass the US in GDP by the middle of this
century. Due primarily to America’s and the EU’s self-inflicted economic damage, the consensus is that China will pass the US and the EU in nominal GDP by 2020. The IMF predicts China passing both in purchasing power parity GDP by 2016.
American political environment and resulting policies are accelerating the power shift to Asia. Although the shift in military power will be slower, global power is more importantly the dominance over ideas and agendas. The impact of this power shift will be dramatic and profound.
Blessed are the emerging markets for they shall inherit the earth.
Welcome to the 21st century.
