Michael Power is with us today as guest blogger. He has a take on the world economy that every North American should understand:
As a sporting spectacle, the Beijing Olympics exceeded even the advanced hype. But, as the images fade, we should remember that this contest was not the only one of Olympian proportions to be playing out in the world. There is also an economic marathon taking place between runners in the West and those in the East, a national relay race that will eventually see the baton of economic primacy being carried – symbolically that baton having been dropped by the US Men’s and Women’s Teams in the 4x100m relay heats in Beijing – by China. The final medal table of the 29th Olympiad may yet come to symbolise the start of this hand-over process.
Final Medals Tally
2 United States
3 Russian Federation.
4 Great Britain
Final Medals Tally
2 United States
3 Russian Federation.
4 Great Britain
Many in the West probably still think – and the lazy love of the familiar more than brute logic is often the father of such thoughts – that the West’s current economic malaise is nothing more than a very bad case of cyclical flu. In such a context, aspiring Western politicians will continue to peddle promises to build a better tomorrow: witness Barack Obama and his “Yes, we can!” pledge. By contrast, few will dare articulate just how structurally passé the West’s current model might soon be and therefore just how difficult delivering on those electoral promises could become.
Overriding the forebodings of that small clique of Westerners not in denial, the ‘yes we can’ apologists for the West still dominate the airwaves of CNBC and Bloomberg. Those daring to suggest that something more seminal might be happening are usually dismissed as the economic equivalent of doomsday merchants wearing “End is Nigh” sandwich boards.
I believe profoundly that the essence of what makes mankind such an optimistic species is our dogged faith in the idea of “hope springs eternal”: indeed Obama’s book captures this determination in its title, “The Audacity of Hope”. For it is humanity’s pre-disposition to dream of a better tomorrow that is the source of that river of human endeavour that irrigates the seeds of a brighter future. And so powerful can be this confidence, it can cut gorges through the granite of counter-logic in forcing its way to the greener pastures of progress. But hope alone cannot guarantee progress and the wellspring of industriousness that feeds the West’s river is not nearly as plentiful as it used to be. Instead, today’s sweaty optimism rises most abundantly where the sun also rises: in the East.
In this game-changing world, a few commentators – George Soros, Marc Faber and Jim Rogers – have suggested that the West is in its worst financial crisis in 30 years precisely because the economic baton is being passed from West to East. As the great economist, Joseph Schumpeter, might have noted, perhaps we are at a crossroads in history where Western destruction is now being offset by Eastern creation. In our far from decoupled world, the West’s economic yin cannot change without impacting the East’s economic yang, and vice versa. So as one zone waxes, the other wanes.
On the one side, the West (and especially its Anglo Saxon heart), by living way beyond its means on the chimera of easily available credit, ever rising household indebtedness and ever increasing fiscal and current account deficits, has enjoyed many decades of prosperity. And, even in the wake of the credit crunch, most Westerners still believe that this model of prosperity is both soundly-based and sustainable. The last year has proved to us it is not.
On the other side, the East (and especially its Chinese heart), by living well within its means with a high domestic savings ratio (45% in China compared to a negative rate in the US), regularly running current account surpluses and maintaining high levels of foreign exchange reserves (the Greater China Club – China, Hong Kong, Taiwan and Singapore – now have over $2.5 trillion) has deferred consumption today and, by funding investments from these savings, set about building a better tomorrow. Indeed, the same time, a not insignificant portion of the East’s savings have also been diverted to plug that savings gap in the West and especially in the US.
By postponing consumption for well over a decade, the East’s hoped for tomorrow has now started to materialise in a better today – Beijing’s emerging splendour is surely evidence of that! And despite the desire by some of the East’s Old Guard to extend its era of abstinence, many Asian governments are now encouraging their constituents to enjoy a bigger share of the fruits of yesterday’s labours. This suggests that the Asian model – one based not upon self indulgence but rather self denial – may ultimately not be sustainable either.
The near mirror-image of these two faces of post-1989 global economic development – one built on using debt to consume tomorrow’s income today, the other built on using today’s savings to build an income-rich tomorrow – was a convenient liaison whilst it lasted, but eventually the complementarities of this so-called Bretton Woods II arrangement were outweighed by its contradictions.
Destabilized by the detritus of the past year’s credit crunch, the unstable equilibrium that arose from this fantastical arrangement has started to implode. Whether the West overindulged or the East eased up on its self-denial is a moot point. Either way, both ways, the one side no longer got all it wanted from the other: perhaps the East saw the West’s thirst for its exported manufactures being slaked, or perhaps the West saw the East’s demand for its debt instruments decline.
As one side pulled back, by definition, so too did the other: the credit that the East extended to the West had been recycled by the West to buy products from the East, thereby creating arguably the largest vendor financing scheme in history. Reduce the flow of one and you necessarily reduced the flow of the other.
And the result of this reduction? The West in particular is enduring the cold turkey shakes that follow the quick withdrawal of the amphetamines of easy credit. For its part, the East is being forced to move beyond an era where “we make TVs and Americans watch them” to one where they too are tentatively starting to become tele-addicts, which is to say ‘consume’.
Invariably a Newer World is emerging, one where the Western consumer will no longer be able to live off the back of the Eastern saver. And this world will be one where the Western consumer, sans that Eastern credit, will no longer be able to afford an ever increasing standard of living, at least until that consumer has broken his addiction to debt and rediscovered the magic of saving.
Not so in the East. By spending more and saving less, the make-up of Eastern economic growth will change, even slowing from its current plus 10% levels. But, given the scale of reserves the East has squirreled away relative to the emptiness of the Western larder, the East has the wherewithal to keep its GDP growing, its currencies strengthening and its wealth accumulating and do so far more rapidly than will henceforth be possible in the West. Thus will play out the particulars of how the baton of economic leadership will pass not between hands but hemispheres, from West to East. Indeed, China will overtake the US in terms of industrial output next year.
History, with its tidy desire to pinpoint such watershed events, may yet decide that the time and the place when this baton began to be passed was 8pm on 08.08.08, as the Olympic Games opened in Beijing, China.
Where were you when this historic moment happened?