Loop the loop…
It has been a few weeks since I have posted – otherwise engaged for a number of reasons – but the news has not really been all that good, unsurprisingly, and nothing much has really changed.
European economic conditions continue to deteriorate, in pretty much every respect, which is always troubling given the debt dynamics and the widening differential between the rate of growth of debt and GDP.
Conditions in Japan (trade deficit, All Industries Activity Index, industrial production, negative provisional Q3 GDP)continue to deteriorate, again a real concern given its debt and population dynamics.
We are all facing a cliff of some sorts…
Growth is not a foregone conclusion in an economic paradigm bordered by high personal debt, fiscal austerity realities and aging populations. Growth depends on capital investment, labour force growth and technological and process improvements. With weak demand dynamics (consumer debt and fiscal austerity, high unemployment), labour and capital are more or less taken out of the equation and we are left with total factor productivity shocks to drive growth forward.
But, we do not necessarily need high levels of growth to remain viable as a society, though we do need to maintain certain levels of capital investment and labour participation. A low growth environment just means that our standards of living are unlikely to noticeably improve, that we may actually consume less for a given real income, and that income per capita and money supply are unlikely to increase.
As debt levels are often based on forward looking assumptions (debt in the past has become manageable because of increases in living standards, tax revenue and earnings), it is more than likely that current debt levels which are too high based on historical GDP growth rates, are well above levels capable of accommodating a low growth scenario. If potential growth rates are low, not just because of debt adjustment, but because of the muted drivers of growth, then a depression type outcome is still not out of the question.
What this means is that interest rates are going to remain low for a long time to come and that deflation remains more likely than inflation (over the medium term), even though shorter term factors may cause short term rises in inflation. It all of course depends on the course of the decline/adjustment.
Low interest rates, reduced capital investment and depreciation of service and manufacturing capacity will also reduce capital return on risk assets, meaning that asset return demand drivers will also continue to be impacted.
With high levels of personal and government debt, problematic distributions of income and wealth and over dependence on consumption in certain economies and production and capital investment in others, the world has come to depend on growth in the densely populated, fast growing BRICs. But, structural issues are also impacting the growth of these economies, at least for the short to medium term, and therein lies the rub.
Our current debt levels were based on a higher growth paradigm, and while a low growth paradigm with lower debt levels (50% to 60% of GDP and below for consumers, and say 40% and below for governments) would be something we could live through, with little angst, I dare say we are all facing a cliff of some sorts, whether we like it or not.
It is the way in the which current data is developing that paints in the reality as we move through it, that suggests that the end point is pretty much out of our hands, and the only choice we have, is how and when we face it.