Tuesday, June 1, 2010

Doom and gloom

I heard Niall Ferguson on the radio recently, mainly reiterating his well-known views on shifts in global economic power (see my post on Ferguson from last month). He was talking mainly about the US and the UK, and suggested that the latter's situation is even worse than the former's.

Essentially we find ourselves in the aftermath of the Global Financial Crisis in a similar position to Europe and America post-World War 2, but worse because of chronic budget deficits. Real interest rates will rise (which is of course bad for business and a drag on growth).

He said he had told an American audience that the GDP of China would surpass that of the US within twenty years. So what? asked a government official. Ferguson responded that anyone who had experienced Britain's decline in the post-war period would not be so nonchalant. And in that case, the UK was being eclipsed by an old and trusted ally, by a country with deep historical links. In the case of China and the US, the process will be more traumatic...

While I'm on this doom and gloom theme I might also mention the views of Stephen King, the chief economist at HSBC, who has recently published a book called (in America) Losing control: the emerging threats to Western prosperity (Yale U.P.). Like Ferguson, he sees bad times ahead for Western countries as they gradually - or not so gradually - forfeit control of their respective economic destinies.

There will be competition for scarce resources (commodities) even as the globalization of labor markets undermines the bargaining power of workers in the currently rich countries. Advantageous (to the US) arrangements such as the dollar as reserve currency will go, raising borrowing costs and reducing long-term growth.

I'd like to say something about possible responses and consequences of all this in the future. For now, just a few thoughts.

In the face of lower relative standards of living in the US and Europe, and in the face of an inevitable (?) brain drain, the West will have to rethink just about everything, from political structures to education.

There are some who will welcome such a fundamental reevaluation and see the process as a cleansing fire. Clearly there are dangers, but a strong case could be made that many of our key institutions and bureaucracies have been severely compromised by special interest groups which are driven by ideology and contribute little or nothing to the general good.