We spent the double-noughts decade on a spending binge. The tens are payback time. It might take a while.
By we, I mean Europeans, North Americans and Australasians. The result has been to push along a redistribution of economic power.
Floyd Norris of the New York Times calculates that an investment spread across all “developed” markets, with all dividends reinvested (and investors “somehow avoided all taxes”), would have had an annual return through the 2000s of 0.2 per cent, “not enough to offset the transaction costs and far below inflation”. The United States return was “negative 2.3 per cent”.
By contrast, on Norris’s figures, in the “emerging” world China’s markets rose 9.7 per cent a year, India’s 14.1 per cent and Brazil’s 20 per cent. Among “developed” markets, only resource-based Canada (9.2 per cent) and Australia (12.7 per cent) were comparable. (New Zealand did 3.9 per cent.)
Norris’s decade is arbitrary. Compare end-1999 with end-1989 and the picture for the United States would look dizzyingly good at the end of the 1990s dotcom euphoria, just before that bubble burst.
But after that bust the United States Federal Reserve Board (central bank), under Alan Greenspan as chair, kept interest rates too low too long. Greenspan (and his intellectual cheerleader, Professor Ben Bernanke) did not figure prices might logically have been falling, not rising, as a result of China’s price-deflating manufacturing expansion and technology-driven price-deflation of services and some manufacturing.
Thus did Greenspan drift away from monetarist injunctions to keep an eye on the rapidly expanding money supply, which was in part driven by heavy borrowing by the government. He believed (backed by Bernanke) that markets were best left to self-regulate. Canny Adam Smith had caveats about that.
Left unregulated, bankers decamped to a new planet where money was unimaginably free. They took along trusting and gullible investors and borrowers. They pumped a huge property bubble. Greenspan and Bernanke believed central banks should not fight asset bubbles but clean up the mess afterwards. Bernanke, from 2006 Greenspan’s successor, has fittingly had that job.
Bernanke had a ready theory: the mess developed because Chinese saved too much and these savings had to go somewhere, so the “west” borrowed them.
Did the Chinese somehow force them to borrow? And did not China’s big savings came partly because its economy was doing real things on this planet?
The loans were splurged on houses and consumer goods. Governments binged on spending and tax cuts and now have huge budget deficits rescuing citizens and banks, piling high and rising government debt on top of high household debt.
Result: the “west” is seriously in hock to the “east”.
Those imbalances must be unpicked, whether slowly and grindingly (more likely) or suddenly and traumatically (less likely). And as they are unpicked the once-dominant “west” will be learning to live with a rising and often unruly “east” which does things differently.
The long march towards freer trade, one of the great drivers of material growth, may take some detours, in part driven by climate change tangles. The World Trade Organisation’s tally of anti-dumping disputes was 437 in 2009, double 2008’s figure.
The “east’s” rise will also likely not be linear. It faces water shortages, particularly in China, India and south-east Asia, some food insecurity, institutional distortions and social tensions in China and maybe India, and competition for resources — including water and food-producing land, which some will try to secure by investing abroad.
There remain also huge differences in wealth within and between countries which, if they are not to incubate costly mayhem, need global economic growth to be strong.
The good news for the world for the 2010s is that there is no strong reason to think innovation will stall. Though history suggests there will not be a repeat in the 2010s of the ICT sunburst, the global capacity to grow material wealth should endure (if there are no big wars).
The good news for the “west” is that the “east” still needs its spending power and technologies.
The good news for New Zealand is that it has supplies the enriching “east” wants. It is resource-rich: water, food catching, producing and processing capacity and energy, including fossil fuels. The complication is that we haven’t saved enough so China and India are likely to own much more of our productive capacity by 2020.
Another complication is that Australia is more resource-rich (except in water but that can be coped with) and will go on vacuuming up materialistic, ambitious, able and resourceful New Zealanders of all occupational classes.
The upshot for this country: a decade of multiple adjustments, some not easy. To stay rich will require first-class tax and regulatory settings and an adventurous business culture.
The 2000s were the decade of illusory wealth. The 2010s are for realism and work.