Is the Global Economy Slowly Falling Apart?

It’s conventional wisdom that the U.S. economy is steadily recovering from the recession, even if progress is slow and disappointing. But there’s also a widespread sense that long-term economic prospects are deteriorating all around the world. Young people can’t find jobs. Budgets keep being cut in both the public and the private sectors. And the projected increase in debt over the next decade figures to be a huge burden for the most highly developed economies. Political systems seem unable to cope with problems that ought to be fairly easy to solve, or at least contain. As the recent crisis in Cyprus demonstrates, a minor dislocation can become a threat to the entire global financial system overnight.
The U.S. is deeply troubled, too. Deficits remain enormous, and the checks and balances of the political system have turned into a logjam. In a new book, David Stockman, President Ronald Reagan’s budget director, chronicles the relentless downward spiral of America’s political and financial systems. He concludes: “The future is bleak… When the latest bubble pops, there will be nothing to stop the collapse.”
This view may be extreme, but there’s hard evidence to substantiate the idea that the global economy is becoming more rickety. Although the developed world today is considerably richer overall than it was when Stockman worked in the Reagan administration, creditworthiness has been steadily declining. The global supply of AAA-rated government bonds has shrunk by more than 60% since the financial crisis began. And while dozens of big U.S. corporations had top bond ratings 30 years ago, today that group has dwindled to four – Automatic Data Processing, Exxon Mobil, Johnson & Johnson and Microsoft.
How seriously should we take these bellwethers? Although there are real problems that need to be solved, the long-term picture doesn’t look entirely bleak. Four major trends will determine global economy stability in the long run:
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Demographics. Populations develop bulges because of changing birthrates. In the most simplistic terms, a bulge of high-spirited young people correlates with disorder and higher crime rates. A bulge of middle-aged people in their peak-earnings years encourages economic growth with relatively low inflation. And a bulge of old people who are no longer working but have substantial health-care needs is a huge drag on an economy. Countries such as Japan and much of Europe already have a bulge of old people, and the U.S. is joining that group. Other countries, such as China, have a bulge of middle-aged citizens but a birth rate that has been declining for some time. They stand to enjoy another decade or two of prosperity before their growth rates begin to slow down. Countries with lots of young people will actually see their growth improve as their populations age.

The Credit Cycle. The amount of debt in leading economies rises and falls over time, creating [url=http://research.stlouisfed.org/fred2/graph/?chart_type=line&width=800&height=480&preserve_ratio=true&s[1][id]=BUSLOANS]boom-and-bust cycles in credit.[/url] The Federal Reserve‘s easy-money policies promoted the high-tech stock boom in the U.S., until the bubble burst in 1999. After a brief credit contraction, real-estate boomed in many countries until 2007, helped by excessive lending in the euro zone and another round of monetary expansion in the U.S. Since the recession ended, however, there have been attempts all around the world to reduce debt or at least slow its growth. Periods of major debt reduction – or “deleveraging,” as economists call it – restrain economic growth and can last five to seven years. The current deleveraging has gone on for four years, so it could be several more years before the economy enjoys really robust growth again.
Technology waves. Important inventions – from the steam engine to the automobile to the computer – create bursts of above-average economic growth, although they sometimes take a decade or longer to have their full effect. The Internet “backbone” was created in 1987, but the stock boom it launched took a while to get going and didn’t peak until 12 years later. Currently, there are a number of new technologies that could have a major economic impact on the overall economy. The one that’s already under way is enhanced oil and gas production, which could fundamentally alter U.S. dependence on expensive foreign oil.
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Government spending. The euro zone and many other countries are now facing some form of austerity. So is the U.S. But the problem isn’t as terrible as it sounds. At last year’s rate, the Federal government would take on $11 trillion of debt over the coming decade. With average growth, however, the U.S. economy could handle another $6 trillion of debt, so the real shortfall is $5 trillion. The tax hikes at the end of last year are projected to raise $600 billion over a decade, and the sequester is scheduled to save $1.2 trillion. More normal economic growth would eliminate the so-called output gap – the difference between what the economy can produce and what it is producing. And that would reduce the annual deficit by $900 billion. That all adds up to $2.7 trillion, and the deficit that remains is $2.3 trillion. As a benchmark, that amount is nearly twice the size of the sequester. Bringing the budget under control would be painful, but not impossible – and there’s a decade in which to do it.
What do these four trends add up to? The last of the Baby Boomers won’t reach retirement for another 16 years, so the economy is facing a demographic headwind. And the need for further deleveraging is also likely to hold back growth for a while. The same is true for many other countries. On the more positive side, America’s budget problems are fixable – and not so terrible when viewed in a long-term global context. Finally, technological breakthroughs that can’t be predicted could give the economy a lift — but at the very least, America’s energy outlook is far brighter than anyone would have imagined 10 years ago.
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There’s always the possibility of external shocks that would knock the U.S. economy off track. But based on the trends that can be evaluated now, it looks as though a sluggish recovery will continue for several years, and that the outlook could well improve after that. The overall picture may not be particularly upbeat, but the worst appears to be behind us. Certainly, the relentless decline foreseen by Stockman and other pessimists seems unsubstantiated by what we can know now.

Read more: http://business.time.com/2013/04/05/is-the-global-economy-slowly-falling-apart/#ixzz2Pq5TT65o