Economic Recap: December 10th

The economic situation worldwide continues to become more clear and more stable, though it’s sometimes hard to glean that out of the media processes.  Yes, there are still issues aplenty, but under all the swoops and swings of financial news and even financial markets, there is a clear sense that we’re trying to manage a recovery now and not trying to prevent another slump.  Volatility is a price we’re going to pay here, but it’s not a bad price overall.

The recovery-management process has created what are essentially two polar extremes in terms of global economy.  One, epitomized by China, is trying to manage a growth explosion that threatens to destabilize not only the economy but even the political system.  The other, epitomized by the EU and in particular the UK, is trying to control the cost in public debt that stimulation policies have created.  The US is somewhat the man in the middle here, for a lot of reasons.  Because the US is the largest global economy and by far the largest consumer market, everyone sees it as a potential ladder for their own growth.  Because of the size of the US economy, government has been prepared to risk a higher debt level than the Eurozone, and recovery here creates a shadow of the inflation issues of China.  In the middle again.

But US trade numbers this week were very favorable.  That’s clearly not because imports have sagged; the consumer economy in the US is recovering.  Exports to China and other emerging markets (Mexico, for example) were stronger.  This demonstrates that the world isn’t acting as a brake on US growth, at least with current trade and currency balances.  It is clearly acting as a brake on employment growth; US companies still tend to offshore jobs to reduce labor costs.

The challenge of the here and now, in truth, is more political than economic.  Look under both our poles and the US middle ground and you see economic processes that are polarizing the population or threatening to.  China has to effectively bribe farmers to stay on the farm.  In the US, financial prosperity for business comes at the price of decades of essential zero-growth incomes for most workers.  In Europe, populations threaten disorder in response to austerity measures that are seen as “populist” in societies that aren’t used to having no wealth to redistribute.

The current Bush Tax Cut fight is an example of this political tension, but of course it will ultimately pass, with perhaps the sacrifice of an estate tax break that we think was likely put in the deal to be sacrificed in the first place.  The good news is that the bill will net to a positive economic impact for 2011, likely raising GDP by at least a quarter-point and perhaps a half.  But the bad news is that it won’t really “create jobs” of any quality.  The fundamental problem of labor as a cost in a business with a profit goal has not been solved, nor has technology (for the first time in fifty years) offered the prospects of a solution.  We are restructuring the nature of employment, and that will of course exacerbate the political polarization.

The issues between China and many of the West, especially the US, also loom as an example of polarization.  Success at the economic level is stressing China, creating a risk of internal strife.  For political reasons, it’s convenient for the west to fan that a bit, and the combination of the North Korea crisis and the Nobel Peace Prize debates are creating more tension with China than usual.  That seems to be polarizing political opinion within China, hardening the hard-line elements.  While we don’t think this is much more than a lot of song and dance on both sides, it does raise the risk of a slip that would create more economic pressure and uncertainty, and so at the moment it probably represents the greatest threat to world economic recovery.

In Europe, Ireland is struggling with austerity measures, and other countries like Spain and Portugal realize the cost of succumbing to the bond raiders.  The EU has been signaling that it will intervene more effectively, making attempts to attack sovereign debt or national banking more risky.  That process may not yet be over, but financial industry moderates realize that pushing too far will rekindle a demand for regulations that would be truly effective, and thus curtail the industry’s free-market piracy.  That would be good, but another fallen sovereign financial pillar is a high price to pay.  Some regulatory sanity is in order, but money talks in politics and we probably have to see much worse to do much better.

Our Annual Technology Forecast issue of our technology journal Netwatcher is coming out this month as usual, and we’ll be looking at the world economy and technology markets in depth there.  This issue will run over 25,000 words, making it the most thorough appraisal of the new technology year that’s likely to be provided anywhere, by anyone.  More economic details, including forecasts for growth, will be provided there.

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