2012 - The year in review
Antony P. Mueller
As we approach the end of the year it turns
out that 2012 was a year when a lot happened but little changed. There was a fierce presidential election
campaign in the United States and after the results were in it was the same as
before. China installed a new governmental body yet it is hard to tell the
difference between the new administration and the old. Almost every day throughout
the year the European debt crisis was in the news but by the end of 2012 the
situation is neither better nor much worse than at the beginning of the year. Likewise,
the debt situation of the United States is as severe as at the beginning of
2012 with no solid improvement of the economy over the year. While 2012 may go
down in history as the year of much ado about nothing, 2013 may be the year of
the great change.
Economic
growth
There is little prospect for very much
higher growth rates than what we’ve experienced over the past couple of years.
Maybe the world economy is already in something that could be called the “Great
Stagnation”. In 2012 each quarter looked as if the rest of the world were
following Japan which entered stagnation in the early 1990s and has been in it
ever since despite fierce monetary easing and massive government spending. The
lessons from the Japanese experience have not yet been learnt. The main lesson says
that to adapt to low growth is better than trying to fight it. In dealing with
this new kind of stagnation conventional macroeconomic policies are of no
avail. On the contrary: they do more harm than good. Firstly, instead of
boosting economic activity, they structurally weaken the economy and, secondly,
whereas the macroeconomic stimulus programs do not work they leave behind a
mountain of public debt and wreak havoc with the financial system due to the
policy of extremely low interest rates.
Price inflation
The world is drowning in liquidity created
by central banks but an equivalent rise of inflation has not yet
happened. Most
of the newly created money is sitting on the sidelines. Commercial banks use
the reserves as a cushion of safety while companies hoard cash partly as protection
against potential risks, partly because managers feel that there are no
lucrative projects out there. The global price level has remained relatively
stable because of international competition. As long as the “Great Stagnation” continues,
there is a limit to rising prices. It is only if the phase of stagnation were
to give way to stronger economic growth that the price level may increase. As
to prices we live in the paradoxical situation that the way out of the stagnation
will probably be accompanied by a drastically rising price level which in turn
would mean that such as recovery would most likely be short lived. Here, too,
the lesson of 2012 is to adapt to the unavoidable and to be careful with
political activism.
Employment
Official unemployment rates have come down
in the United States not so much because of a pick-up of economic activity, but
because the share of discouraged worked has been rising. While the officially
published statistics shows a decrease, the broader measure shows an increase of
the already high level of unemployment. The situation is
even bleaker in the European crisis states such as Greece, Portugal and Spain.
Although the overall economic situation is better in Italy or France,
unemployment in these countries has risen from their already high level. These
persistent high levels of unemployment pose a huge burden on public finances
which gets squeezed from both sides as social expenditure increase while
revenues fall.
Global trade
Although many parts of the world economy
are in turmoil, international trade has kept up fairly good over the past year
and it seems as if the process of specialization were to continue on a global
scale. Yet most of the old problems are still with us and the year 2012 has
brought not only no solution but also got us not much closer to a solution. The
huge international trade imbalances have not disappeared. The US is still stuck
with a gigantic trade deficit which means that the country depends on foreign
funds. The counterpart to the United States is China that records persistent
trade surpluses and by the same token provides funds to be invested overseas,
particularly in US government bonds. China, along with Japan, is the main
international financier of the American trade deficit. It is hard to tell how much
longer such an imbalance could continue. Theoretically it will end when it is
no longer beneficial for either side. This point is getting closer. The US has
become more fearful about its debt problem while China must consider a shift of
its production from exports to the interior market. This process will take a
long time but it looks as if we are already in the early stages of such a
shift, which may continue for many years to come.
International debt
The year 2012 may well be remembered as the year of the European debt
crisis. Hardly a day has gone by without some news ticker announcing the end of
the euro, the break-up of the European Union and the collapse of the European
economy. Yet nothing of this kind has happened. Greece is still a member of the
euro zone and its latest debt buy-program was successfully accomplished. In the
meantime the US moves closer to its “fiscal cliff” and is facing new downgrades
of its debt. The US has abstained from austerity partly because 2012 was an
election year. This means the United States will now have a lot to do in order
to catch up. While the current political discussions concentrate on how to
avoid the fiscal cliff, a fall over the fiscal cliff is probably the best thing
that could happen now to America because it would force the US government and
Congress to address the American debt problem in the manner of urgency and
seriousness which is needed.
Outlook
2013 promises to become an interesting year – which means that for
most people it won’t be a pleasant time. If there should be a more remarkable
uptick of economic activity, price inflation most likely will emerge with it
and the recovery would prove to be unsustainable. Mass unemployment will
continue in the US and in Europe and pose a heavy burden on public finances.
The European debt crisis is not yet over while the hot phase of the US debt
crisis is about to begin. There is little prospect for Japan to get out of
slump while at the same time China’s growth rates will get lower. Brazil,
another member of the ominous BRICs, has tanked in 2012 and the prospects for
economic growth in 2013 are not much better. The same holds for Russia. India
has all the potential but is hampered by many obstacles to become a strong
economy. The world economy and world politics is full of tensions waiting to
erupt.
While 2012 was a year in which many things happened but little
changed, 2013 may be the year when a few key events may well cause drastic
change.
