We are currently witnessing a rude awakening in newly industrialising countries (particularly those of Eastern Europe), whose citizens have suddenly realised that they were not as affluent as they once thought. And we in the West may also be in for some serious difficulties in the near future.
Our society had been headed in the wrong direction at full speed for far too long. Which explains why what we’re going through now is no normal recession, but rather the kind of economic crisis that occurs only every century or so. Thus the question arises: what now? Well, the answer is that all concerned – businesses, private individuals, governments and central banks – need to substantially lower their economic expectations for the future.
In hindsight, world-wide economic growth now appears to have been the mere illusion of growth. But actually this comes as no surprise. For well before the crisis hit, there were clear signs of economic overheating such as the dramatic rise in the prices of food, energy and other raw materials. And even now, in the midst of a grave economic crisis, raw materials prices are sinking.
Economic growth: the grand illusion
All of this is a clear sign that shortages of petroleum and other key raw materials, as well as arable land and clean water, have permanently slowed the pace of economic growth.
The following additional factors have also played a role in this evolution: the financial crisis, which has created a massive credit crunch; the contraction in the financial sector; government intervention in the economy, which dampens economic dynamism; and demographic ageing, which is already a palpable phenomenon in Japan and North America. The trend is clear: for the foreseeable future, global economic growth will be far slower than was previously thought.
We are currently witnessing a rude awakening in newly industrialising countries (particularly those of Eastern Europe), whose citizens have suddenly realised that they were not as affluent as they once thought. And we in the West may also be in for some serious difficulties in the near future.
First and foremost there’s inflation. When economic growth hits the skids, it means that the economy is overheating. This in turn means that central banks need to put the brakes on the economy at the first signs of an upswing and recoup the liquidity that they’ve been pumping into the economy for months.
But it may easily be the case that the central banks’ current reading of the situation is unduly rosy and that inflation-free growth may actually be lower than their forecasts would lead them to believe. This happened in the 1970s as well. Central banks, and particularly the Fed, overestimated the rate of economic growth, which led to galloping inflation that they were only able to bring under control by raising the prime interest rate to painful levels.
The second problem is government deficits. An economy that lacks dynamism will have difficulty reducing its national deficits by means of economic growth. And it will be equally difficult to get a handle on government budget deficits in the coming years. In fact, the fiscal situation is set to worsen, and the massive government debt that has been racked up during the crisis will come back to haunt us. And what’s more, high unemployment and wage stagnation will reduce personal income and ramp up government expenditures.
The possible solutions are far too makeshift. Raising taxes slows growth even further. Budget cuts are political anathema. Inflation undermines confidence in a nation’s currency and institutions. And a confluence of these three evolutions is a highly unlikely prospect.
Needless to say, life was much easier when we all subscribed to the illusion of growth without end.
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